HOW  GERMANY 
DOES  BUSINESS 


HOW  GERMANY 
DOES  BUSINESS 

CHAPTERS  ON  EXPORT 
AND  FINANCE  METHODS 

BY 
DR.  PAUL  PENSAC  GOURVITCH 


WITH  A  PREFACE  BY 

DR.  B.  E.  SHATSKY 


NEW  YORK 

B.  W.  HUEBSCH 
MCMXVII 


COPYRIGHT,  1917,  BY 
B.  W.  HUEBSCH 


First  printing,  October,  1917 
Second  printing,  March,  1918 


£lfr 


PRINTED    IN    THE   UNITED   STATES   OF    AMERICA 


c. 


To  Miss  Adelaide  R.  Hasse,  Chief  of  the  Eco- 
nomics Division  of  the  New  York  Public  Li- 
brary, the  author  wishes  to  express  his  apprecia- 
tion and  thanks  for  the  kind  supervision  of  the 
style  of  the  book. 


389505 


PREFACE 

As  I  attribute  great  importance  to  the  question  of 
the  most  expeditious  development  of  Russia's  in- 
dustrial forces  and  the  establishment  of  close  eco- 
nomic bonds  between  the  United  States  and  Rus- 
sia, it  affords  me  great  pleasure  to  write  the  pref- 
ace to  this  book. 

The  author,  among  other  things,  deals  with  and 
reveals  the  interesting  and  up  to  the  present  little 
known  activities  and  methods  of  Germany  in  her 
economic  relations  with  Russia  and  other  foreign 
countries. 

The  time  has  come  for  Russia  to  rid  herself  of 
German  economic  influences,  which  aim  at  the  ex- 
ploitation of  her  markets.  But  at  present  our 
Free  Fatherland  is  still  far  from  being  what  the 
Greeks  called  "autarchy."  Russia  cannot  yet  be 
self-supporting,  she  has  need  of  foreign  capital  to 
help  her  to  realize  her  great  economic  develop- 
ment. 


PREFACE 

The  economic  situation  in  Russia  today  closely 
resembles  that  of  the  United  States  at  the  end  of 
the  Civil  War.  Conditions  were  then  tragic,  the 
United  States'  credit  was  tottering,  and  there  ap- 
peared on  the  horizon  a  threatening  spectre  of  a 
heavy  National  Debt  and  exhaustion  of  the 
States'  finances.  The  outlook  seemed  desperate 
and,  to  many,  her  economic  basis  apparently  hope- 
lessly shaken.  Yet,  within  a  few  years  the 
United  States  entered  an  era  of  prosperity;  her 
population  had  increased,  and  a  period  of  eco- 
nomic success  had  dawned. 

At  this  critical  time  in  her  history,  foreign  capi- 
tal flowed  into  the  country  to  assist  her  in  the 
work  of  reconstruction. 

Free  Russia, — doubly  free — free  from  the  op- 
pression of  autocracy,  free  from  the  control  of 
Germany's  despotic  economic  guardianship, — now 
faces  the  same  problems  as  did  the  United  States. 

American  capital,  united  with  Russian  Democ- 
racy, will  be  called  upon  to  furnish  the  construc- 
tive forces  of  New  Russia. 

For  American  capital  the  field  of  activity  is 


PREFACE 

practically  unlimited:  development  of  Russia's 
mineral  deposits;  building  of  her  railroads;  bet* 
tering  the  methods  of  her  industries  (iron,  coal^ 
timber,  naphtha,  etc.);  efficient  handling  of  her 
agricultural  products  and  raw  materials;  raising 
the  standards  of  her  technique  and  numerous  other 
undertakings. 

The  experience  and  wisdom,  acquired  by  the 
United  States  in  so  successfully  solving  the  eco- 
nomic problems  following  the  Civil  War,  will  en- 
able her  materially  to  aid  and  assist  Russia  in  her 
similar  difficulties. 

Good  fortune  that  predestined  the  United 
States  to  be  Russia's  intimate  friend,  will  lead  to- 
wards a  lasting  and  mutually  beneficial  union. 
Our  Free  Fatherland,  bound  now  by  ties  of  broth- 
erhood and  blood  with  our  Great  Ally,  will  heart- 
ily welcome  this  economic  collaboration,  which, 
has  already  started,  in  spite  of  war  conditions. 

DR.  B.  E.  SHATSKY, 

(Of  Retrograd). 


CONTENTS 

I    POLITICS  AND  ECONOMICS  11 
II    BANKING  FACILITIES:  ADVANTAGES  FROM  IN- 
TERNATIONAL BANKING  14 

III  CREDITS  :  CREATORS  OF  DEMAND  18 

IV  CREDITS:  SMALL  UNITS  AND  BIG  TOTALS  22 
V     IMPORTERS  AND  EXPORTERS  OF  CREDITS:  AC- 
CEPTANCE BUSINESS  26 

VI     CLEAN    CREDITS   OPENED   BY   THE   EXPORTER 

WITHOUT  THE  IMPORTER'S  KNOWLEDGE  37 
VII     GERMANY'S  MERCHANT  MARINE  46 
VIII     EXPORT  ARTICLES  47 

IX    REDUCING  THE  BUYER'S  EFFORT  TO  THE  MINI- 
MUM 51 

X  GERMANY'S  ECONOMIC  EXPANSION  AS  A  BENE- 
FICIAL FACTOR  IN  INTERNATIONAL  DEVELOP- 
MENT 55 

XI    THE  EXPORT  OF  MEN  58 
XII     IMITATION  AND  COUNTERFEITING  62 

XIII  LITTLE  THINGS  OF  GREAT  IMPORTANCE  69 

XIV  EXPORT  PUBLICITY  71 

XV    SAVINGS  IN  CUSTOMS  DUTIES  74 
XVI    EXPORT  BY  MAIL  76 


CONTENTS 

XVII     THE  COST  OF  LABOR  85 

XVIII     GERMANS  AS  IMPORTERS  AND  RE-EXPORTERS  91 
XIX    GERMANS  AS  FOREIGN  INVESTORS  97 
XX     THE  METHOD  OF  THE  CHAIN  108 
XXI     COLLECTING  THE  VOTING  RIGHTS  115 
XXII     ELIMINATION    OF    WASTE:    COLLECTING    THE 

WORLD'S  ENERGY  121 

XXIII     GERMAN  INTERNATIONAL  POLICY  IN  FOREIGN 
TRADE  128 


HOW  GERMANY  DOES 
BUSINESS 


POLITICS    AND    ECONOMICS 

THE  methods  employed  by  Germany  in  the  field 
of  international  trade  and  finance  are  still  little 
known,  though  everybody  has  heard  of  the  won- 
derful development  achieved  by  that  country  in  a 
relatively  limited  period  of  time.  As  the  author 
of  the  famous  book  "J' Accuse"  says,  Germany's 
development  went  so  far  as  to  have  her  colonies 
planted  in  London,  Paris,  Genoa,  etc. 

What  was  the  spur  which  caused  her  growth  and 
expansion,  and  what  were  the  means  through 
which  they  were  accomplished? 

As  the  United  States  is  now  becoming  a  leading 
factor  in  the  field  of  foreign  trade  and  finance, 
and  has  already  achieved  great  results  in  it,  the 


ii 


12     HOW  GERMANY  DOES  BUSINESS 

following  analysis  of  Germany's  methods  will, 
perhaps,  be  instructive.  More  so  because  the  ef- 
ficiency of  Germany's  warfare — one  of  her  many 
industries,  as  it  has  been  well  said — lies  in  the 
application  of  her  business  methods  to  war. 

From  the  very  fact  of  her  late  entry  into  the 
field  of  foreign  trade,  both  necessity  and  competi- 
tion made  Germany  inventive.  Being  one  of  the 
last,  she  was  forced  to  devise  new  arms  in  order  to 
secure  the  trade. 

In  justice  to  Germany,  it  must  be  stated  that 
the  general  influence  of  her  work  was  a  Kultur- 
tragerig  (culture-carrying),  since  success  de- 
pended largely,  not  only  on  the  welfare  and  de- 
velopment of  the  country  to  which  she  exported, 
but  of  all  other  nations  to  a  certain  degree. 
Germany's  chief  competitors,  such  as  England 
and  France,  profited  by  her  work.  By  stimulat- 
ing the  accumulation  of  capital  in  the  less  civi- 
lized countries,  these  were  made  richer  and  the 
_  prospects  of  world  exchange  enlarged.  More- 
over, this  work  in  itself  was  a  work  of  peace  and 
internationalization  because  war,  national  isola- 


POLITICS  AND  ECONOMICS         13 

tion  and  self-sufficiency  were  incompatible  with 
the  very  spirit  of  her  work, — although  it  is  now 
evident  that  the  Imperial  Government  regarded 
its  foreign  trade  expansion  from  a  different  point 
of  view.  In  the  plan  of  international  politics,  it 
might  be  considered  that  German  business  re- 
ceived the  government's  encouragement  and  was 
the  blind  tool  of  an  imperialistic  ambition  which, 
up  to  three  years  ago,  would  have  seemed  unreal- 
izable and  little  more  than  a  terrible  anachronism, 
just  as  the  German  railroad  network  might  have 
been  regarded  differently  by  the  business  commu- 
nity than  by  the  "Junker"  class  which  backs  the 
Imperial  Government. 


II 

BANKING    FACILITIES 
ADVANTAGES   FROM    INTERNATIONAL   BANKING 

THE  Germans  were  early  aware  that  the  function 
of  financing  trade  is  of  predominant  importance. 
On  the  one  hand  they  had  before  them  the  expe- 
rience of  English  importers  of  whose  trade  meth- 
ods they  were  quick  to  take  advantage,  while  on 
the  other  hand  they  found  ready  the  machinery  of 
English  banking  which  they  used  for  commer- 
cial credits. 

Indeed,  to  find  a  way  of  financing  is  to  have 
found  the  commercial  carrier  for  the  shipments, 
just  as  to  charter  a  ship  for  loading  means  to  the 
exporter  to  have  found  the  material  carrier.  As 
we  shall  see  later,  the  Germans  financed  their  for- 
eign trade  largely  through  London,  but  sometimes 
through  Paris  and  other  money  markets.  Some- 
times they  financed  it  through  the  country  to 

14 


BANKING  FACILITIES  15 

which  they  were  exporting.  In  so  doing  they 
were  relieved  of  the  financial  burden  of  trade,  but 
were  under  the  obligation  to  allow  their  transac- 
tions to  pass  through  the  hands  of  foreign  banks 
and  thus  perforce  reveal  some  of  the  details  of 
their  work  which  they  preferred  not  to  disclose. 
They  realized  that  in  many  instances  an  English 
bank,  for  example,  could  not  be  expected  to  give 
them  all  the  necessary  information  and  advice  be- 
cause, leaving  aside  patriotic  considerations,  doing 
so  would  mean  to  the  bank  to  encourage  German 
competition  at  the  expense  of  an  old  customer  en- 
gaged in  the  line  investigated  and  so  eventually 
work  harm  to  itself.  In  the  same  measure  as  the 
old  customer  lost  trade  the  bank  would  weaken  its 
own  position  in  exchanging  an  old  and  tried  client 
for  a  new  and  untried  one. 

This  problem  of  information  so  vitally  import- 
ant in  foreign  trade, — the  more  so  for  Germany 
since  her  business  was  done  on  a  credit  basis, — 
was  partly  solved  by  powerful  organizations  like 
Schimmelpfeng  Information  Co.,  which  had 
branches  all  over  the  world. 


16    HOW  GERMANY  DOES  BUSINESS 

Entrance  into  the  field  of  international  bank- 
ing possessed  other  attractions  besides.  First,  it 
was  a  profitable  gap  to  be  filled  in  the  world's 
money-changing  machinery,  and  thus  offered 
profits  as  a  business  in  itself.  It  further  offered 
the  attractive  possibility  of  dealing  in  credits, 
thanks  to  the  machinery  of  the  English  open-dis- 
count market.  Again,  banks  in  far-away  coun- 
-  tries  had  a  distinct  advantage  of  time  and  place. 
Money  rates  are  usually  high  in  countries  very 
distant  from  the  big  money  markets : — that  is  the 
advantage  of  place.  To  instance  the  advantage 
in  time,  a  draft  drawn  on  a  European  center  from 
such  a  distant  country  is  paid  only  on  arrival, 
some  twenty  or  thirty  days  later,  during  which 
time  the  buying  house  can  use  the  money  gratu- 
itously. 

International  branch  banking  is  the  highest 
form  of  efficient  banking  from  the  superiority  of 
its  central  organization.  Germany  quickly  took 
advantage  of  this  since  she  could  supply  very  lit- 
tle capital  of  her  own  to  the  country  with  which 
she  was  doing  business,  but  could  find  the  money 


BANKING  FACILITIES  17 

either  in  the  importing  country  itself  or  in  the 
large  money  markets  of  the  world.  Her  success 
proves  that  much  still  remains  to  be  done  in  de- 
veloping this  branch  of  international  activities. 
In  the  United  States  the  problem  of  exporting  is 
now,  as  it  will  be  after  the  War,  primarily  and 
chiefly  one  of  banking  facilities.  This  will  ap- 
pear more  clearly  when  we  see  that  the  scope  at- 
tained by  Germany's  trade  development  was  due 
to  the  fact  of  having  brought  to  life  an  elastic  fi- 
nancial machinery  so  as  not  to  be  handicapped  by 
inadequate  financial  instruments. 


Ill 

CREDITS 
CREATORS   OF   DEMAND 

THE  Germans  offered  credit  to  their  customers 
primarily  because  English  merchants  sold  chiefly 
on  a  cash  basis.  But  very  soon  they  found  out  by 
experience  that  credit  is  a  creator  of  demand  and 
therefore  an  incentive  to  consumption  and  at  the 
same  time  a  stimulus  to  production  and  the  saving 
of  capital.  In  the  early  stages  of  their  expe- 
rience and  sometimes  later,  at  the  height  of  their 
activities,  the  Germans  naturally  learned  some 
costly  lessons  as  a  result  of  going  too  far  in  their 
credit  liberality.  This  is  seen  clearly  in  the  case 
of  Japan. 

When  the  Germans  entered  the  Japanese  field 
they  offered  the  Japanese  merchants  credit  induce- 
ments which  were,  as  a  rule,  unknown  at  that  time 

in  that  country.     Japan's  trade  had  been  strictly 

18 


CREDITS  19 

on  a  cash  basis  until  then,  i.e.,  deposit  with  or- 
der, balance  against  documents  on  delivery.  In 
1906,  when  numerous  failures  followed  the  great 
Japanese  boom,  Germans  suffered  heavy  losses. 
Allowing  the  Japanese  excessive  credit  and  ex- 
tending their  indebtedness  more  and  more,  the 
Germans  had  gone  far  beyond  the  real  necessity  of 
credits  and  thus  made  the  buyer  overbuy.  At 
that  time  the  Japanese  buyer,  so  far  as  the  middle 
class  was  concerned,  stood  far  beneath  the  Euro- 
pean merchant.  Germans  had  overlooked  that. 
Their  work  accordingly  had  rather  a  corruptive 
influence.  By  straining  the  buying  capacity  of 
the  dealer,  the  German  credit  accommodation  dis- 
organized the  market  rather  than  assisted  it. 
Germans,  however,  were  always  able  and  willing 
to  profit  by  the  lessons  of  their  experience.  They 
abandoned  speculation  in  credit  and  found  a 
sound  economic  basis  for  it. 

The  purpose  of  credit  is  to  give  the  dealer  the* 
possibility  of  paying  for  the  merchandise  when  at 
least  a  part  has  been  sold.     Thus  the  selling  ca- 
pacity of  the  merchant  is  made  independent  of  his 


20     HOW  GERMANY  DOES  BUSINESS 

financial  resources.  However,  where  business 
ethics  are  undeveloped  and  the  merchant  is  un- 
acquainted with  such  arrangements  even  in  his 
domestic  trade,  credit  facilities  may  well  con- 
stitute a  danger.  In  such  a  country  the  dealer  is 
inclined  to  consider  goods  which  he  does  not  pay 
for  as  if  he  had  acquired  them  by  his  own  artful- 
ness. Being  unable  to  realize  what  a  commer- 
cial obligation  is,  he  will  necessarily  try  to  deceive 
his  creditor. 

It  is  sometimes  asserted  that  Germans  allowed 
credit  without  discrimination.  As  a  rule,  they 
did  not  do  so;  but  the  discrimination  was  gener- 
ally of  a  different  type,  based  on  economic  neces- 
sity, and,  as  we  shall  see  later,  the  Germans  ran 
perhaps  less  risks  than  other  exporters  in  the  long 
run. 

-  Credit  to  be  sound  must  be  self-liquidating.  In 
normal  conditions,  if  less  time  is  allowed  than  is 
^necessary  for  the  merchant  to  dispose  of  the  goods, 
it  will  mean  putting  obstacles  in  the  importer's 
way  to  his  merchandising,  and  will  eventually  lead 
to  underestimating  his  ability  and  thus  limiting 


CREDITS  21 

his  activity  to  the  actual  amount  of  his  cash  or  his 
own  limited  financial  arrangements.  Allowing 
too  much  time  to  the  importer  means  encouraging 
him  to  neglect  his  obligation  and  consequently  to 
overbuying  and  speculation.  Sometimes  it  will 
even  make  him  actually  forget  the  existence  of  his 
debt  and  make  him  fall  a  victim  of  his  own  em- 
broilment and  exaggeration.  The  Germans,  how- 
ever, in  according  their  credits  took  into  considera- 
tion the  conditions  of  the  country.  In  Russia  for 
instance,  which  is  known  as  a  country  of  small 
turnovers  and  slow  liquidations,  long  credits  were 
of  vital  necessity,  especially  in  Siberia  and  other 
less  civilized  Russian  regions.  Just  as  the  mag- 
nitude of  all  our  modern  commerce  was  built  on 
and  by  credit,  the  trade  in  the  above  mentioned  re- 
gions owes  its  existence  largely  to  the  German 
credit  facilities. 

As  a  rule,  German  terms  were  90  days  sight 
draft  or  open  account  for  the  same  time. 


IV 

CREDITS 
SMALL  UNITS  AND  BIG  TOTALS 

I  READ  recently  in  an  English  economic  review 
the  statement  that  there  is  much  exaggeration  rela- 
tive to  the  use  which  Germans  are  said  to  make  of 
credit.  The  author  affirmed  that  English  manu- 
facturers were  as  quick  to  give  credit  accommoda- 
tions as  Germans,  when  the  solvency  of  the  cus- 
tomer warranted  it.  This  argument  shows  how 
little  the  spirit  of  German  credit  is  still  appre- 
ciated. 

The  reasoning  of  a  German  was  a  very  simple 
one.  He  tried  always  to  draw  a  parallel  with  his 
own  country,  although  in  the  course  of  his  experi- 
ence he  learned  that  things  are  somewhat  different 
in  other  countries.  But  in  the  main  he  knew  that 
human  nature  is  the  same  the  world  over.  The 
German  easily  assimilated  new  impressions  and 

22 


. 


CREDITS  23 

knowledge.  He  gladly  and  readily  went  abroad 
to  study  the  life-conditions  and  psychology  of 
other  nations.  The  idea  that  people  are  all  at 
heart  the  same  was  very  characteristic  of  the  Ger- 
mans, and  of  great  assistance  and  encouragement 
to  them. 

The  Germans  reasoned  thus :  in  a  small  German  -^ 
town,  in  every  line  of  trade  there  is  a  certain  num- 
ber of  small  dealers  who  are  good  for  a  credit  of 
say  one  thousand  marks,  just  as  Frau  Krupp-Boh- 
len  is  good  for  one  million.  As  there  are  many 
such  towns  in  Germany,  there  are  plenty  of  these 
good  credit  risks.  Now,  if  that  is  true  of  Ger- 
many, it  is  true  of  other  countries  and  of  all  the 
world.  In  business  as  in  philosophy,  the  Ger- 
mans liked  to  embrace  the  whole  of  the  universe. 

That  was  really  something  new  in  foreign  trade. 
The  English  exporter  would  deal  only  with  first- 
class,  big  concerns  which  were  already  known  as 
large  importers.  The  idea  did  not  creep  into  his 
head  that  there  were  other  merchants  besides 
these.  The  Germans  thus  discovered  a  new,~ 
working  class  of  importers.  To  give  these  smaller 


24    HOW  GERMANY  DOES  BUSINESS 

dealers  such  facilities  as  would  enable  them  to 
buy  and  to  pay,  just  as  the  Germans  did  with  their 
own  domestic  trade,  meant,  according  to  the 
theory  of  probabilities,  to  build  up  a  sure,  conser- 
vative clientele  of  "geographical  distribution"  as 
the  financier  would  say.  The  individual  units 
were  good  because  small  and  conservative,  and  be- 
cause the  credit  granted  them  was  only  such  as 
their  character  and  ability  warranted.  The  num- 
ber was  still  better,  since  the  magnitude  of  the 
number  of  units  made  it  possible  to  depend  less  on 
any  one  of  them.  To  place  less  dependence  on  a 
single  unit  meant  to  avoid  the  risks  of  shocks  and 
failures.  I  know  of  one  concern  which  during 
eight  years'  time  incurred  a  loss  of  less  than  one- 
fifth  of  one  per  cent,  of  its  total  business,  which 
was  entirely  on  credit.  It  not  only  put  its  eggs 
in  many  baskets  but  it  found  thousands  of  new 
baskets  in  which  to  put  them.  It  is  obvious  that 
they  ran  less  actual  danger  in  their  large  number 
of  risks  than  exporters  who  dealt  with  only  a  few 
and  on  a  large  scale.  For  one  of  the  latter  to  lose 
a  client  was  to  lose  a  considerable  part  of  his 


CREDITS  25 

trade.     A  failure  of  his  client  meant  a  heavy  loss 
and  sometimes  his  own  bankruptcy. 

Now  it  will  perhaps  be  understood  why  chance  < 
travellers  in  the  small  towns  of  Europe  found  very 
high-grade  goods,  sometimes  German  and  even 
American,  in  stock  in  the  small  shops.  The  small 
provincial  merchants  could  obtain  them  almost  as 
cheaply  as  the  large  department  stores  through 
the  help  of  the  German  credit  system  and  thanks 
to  the  German  policy  of  assisting  small  merchants. 
Having  lower  expenses  and  being  satisfied  with 
less  profit  these  small  merchants  could  sell  the  best 
goods  at  the  same  price  at  which  they  were  pur- 
chasable in  the  large  cities. 


IMPORTERS    AND    EXPORTERS    OF    CREDITS 
ACCEPTANCE    BUSINESS 

THE  Germans  early  availed  themselves  of  Eng- 
lish money  and  banking  machinery  as  well  as  of 
the  facilities  of  many  other  international  money 
markets.  If  it  had  not  been  for  the  London  open 
discount  market  it  is  very  doubtful  whether  Ger- 
man trade  could  have  achieved  the  magnitude  it 
did.  To  be  able  to  distribute  credits  as  freely  as 
she  did,  Germany  needed  either  to  be  very  rich  in 
capital  and  accumulated  wealth  and  to  use  credits 
as  a  channel  of  investment,  or  to  find  some  way  to 
attract  other  people's  money  to  finance  their  trade. 
As  they  did  not  have  too  much  money  of  their 
own,  they  financed  their  trade  largely  through  the 
London  money  market. 

The  London  money  market,  with  its  abundant 
resources  swelled  by  the  balances  carried  there  by 

26 


IMPORTERS  OF  CREDITS          27 

foreign  and  colonial  governments,  banks  and 
financiers,  could  absorb  any  amount  of  bills. 
There  was  practically  no  limitation  to  the  Ger- 
man's ability  to  import  cheap  credits  from  Eng- 
land and  later  to  re-export  them  in  a  dearer  form 
to  the  foreign  customer  who  bought  German  manu- 
factures on  credit.  The  only  limitation  lay  in  the 
amount  of  paper  on  a  single  acceptance  house 
which  the  bill-brokers,  and  ultimately  the  bank- 
ers, were  willing  to  buy.  They  fixed,  roughly, 
the  maximum  amount  of  acceptances  which  they 
judged  normal  for  any  one  acceptance  house. 
The  standing  of  the  drawer  was  taken  into  consid- 
eration very  little. 

Several  years  ago  the  term  "open  discount  mar- 
ket" would  have  required  some  explanation. 
Now,  such  a  market  already  exists  and  thrives  in 
New  York,  thanks  to  the  Federal  Reserve  reform, 
to  the  accumulation  of  capital,  and  to  the  fact 
that  Dollar  Exchange  is  more  and  more  coming  to 
be  a  recognized  standard  of  foreign  exchange,  and 
ultimately  to  the  stability  of  American  currency 
which  has  attracted  foreign  funds  to  the  United 


28    HOW  GERMANY  DOES  BUSINESS 

States.  There  is  not  yet,  and  perhaps  never  will 
be,  in  New  York,  as  in  London,  a  special  class  of 
concerns  known  as  "acceptance  houses"  which 
specialize  in  acceptance  business.  As  a  class,  his- 
torically they  represent  former  importers  who  have 
given  up  the  merchandising  portion  of  their  busi- 
ness to  devote  themselves  exclusively  to  the  func- 
tion of  financing  imports  for  a  consideration 
called  a  commission.  With  their  well-established 
credit  of  long  standing  their  bills  sell  at  the  low- 
est discount  and  any  importer  who  wishes  to  have 
his  imports  financed  cheaply  makes  arrangements 
with  such  a  house  which  agrees  to  accept  bills 
drawn  on  it.  This  is  called  opening  a  credit  with 
the  acceptance  house  in  favor  of  the  importer. 

A  great  many  of  these  acceptance  houses  in  Lon- 
don were  of  foreign  origin,  mostly  German,  since 
"foreign"  in  a  European  country  almost  always 
meant  German,  at  least  so  far  as  business  was  con- 
cerned. Fritz  Diepenhorst  (Revue  Economique 
Internationale,  1914,  I)  goes  further,  asserting 
that  it  was  Germans  who  established  the  basis  of 
foreign  exchange  business  in  London  when  Lon- 


IMPORTERS  OF  CREDITS          29 

don  replaced  Amsterdam  as  the  world's  money 
market.  It  is  true  that  all  over  the  world  the  Ger- 
mans almost  monopolized  Foreign  Exchange  and 
Arbitrage  business,  in  the  capacity  of  foreign  bill 
brokers  or  managers  of  foreign  exchange  depart- 
ments in  banking  and  financial  institutions.  We 
shall  now  see  how  Germany  took  advantage  of  the 
acceptance  mechanism. 

When  the  German  manufacturer  for  instance 
sold  goods  worth  10,000  marks  in  Spain,  on 
credit  either  at,  say,  three  months'  sight,  or  on  open 
account  for  the  same  time,  besides  the  draft  drawn 
on  his  customer  in  Spain,  he  drew  a  draft  called  a 
finance  bill  of  say  £500  on  an  acceptance  house 
in  London  with  whom  previous  arrangements  as 
to  time,  renewability  of  the  bill,  amount  of  the 
"revolving  credit"  granted,  the  commission  of  the 
acceptance  house,  etc.,  had  been  made.  The  draft 
accepted  in  London  was  sold  to  the  bill  broker  or 
to  any  other  short  term  investor,  the  proceeds  being 
credited  to  the  German  banker's  account  in  his 
London  bank.  After  three  months  the  manufac- 
turer's customer  in  Spain  had  to  pay,  through  one 


30    HOW  GERMANY  DOES  BUSINESS 

channel  or  another,  the  draft  sent  for  collection. 
He  might  remit  by  sight  draft  in  marks  or  send  a 
post  office  money  order  to  cover  the  open  account, 
if  that  form  of  credit  had  been  chosen.  It  was  a 
question  of  arrangement  with  the  bank  through 
which  the  draft  had  been  sent  for  collection,  how 
to  collect  in  the  cheapest  way  this  money  now 
available  in  Spain  and  carry  it  to  London,  where 
the  funds  had  to  be  sent  in  order  to  meet  the  draft 
the  London  house  had  accepted.  It  was  a  matter 
of  arrangement  whether  the  collecting  bank  was 
under  orders  to  send  this  money  to  London  di- 
rectly, or  whether  it  bought  a  cable  or  demand 
draft  in  marks  and  sent  it  to  the  German  manu 
facturer  who  has  previously  drawn  his  cfrai 
on  the  London  acceptance  house  so  as  to  have' 
margin  of  time  in  which  to  receive  the  money  from 
Spain  and  send  it  back  to  London,  or  whether  with 
the  help  of  a  powerful  international  banking  or- 
ganization all  these  operations  by  which  the 
funds  were  gotten  from  Spain  to  London  were  re- 
duced to  simple  entries  in  the  books,  diminishing 
the  importer's  bank  account  by  the  amount  of  the 


IMPORTERS  OF  CREDITS          31 

draft  and  increasing  by  so  much  the  deposit  ac- 
count of  the  acceptance  house.  In  the  absence  of 
any  such  real  clearing  machinery  in  London  where 
the  importer,  exporter  and  acceptance  house  or 
their  bankers  kept  balances,  the  clearing  was  done 
by  banking  movements  previously  mentioned. 

In  its  financial  aspect  this  credit  structure  from 
the  German  exporter's  point  of  view  was  a  clean 
credit  opened  by  the  exporter  in  his  own  favor. 

In  the  foregoing  example  we  have  assumed 
that  the  draft  was  for  three  months  only.  In  case 
the  exporter  granted  longer  credit,  he  had  to  make 
an  arrangement  to  renew  his  draft  on  the  accept- 
.  ance  house  at  the  end  of  each  three  months  in  or- 
.der  to  allow  time  for  the  importer's  funds  to  reach 
London.  If  the  German  exporter  drew  his  first 
draft  of,  say  X  pounds  in  order  to  get  Y  marks, 
he  had  to  draw  his  second  draft  for  X  plus  Z 
pounds  in  order  to  realize  on  it  the  equivalent  in 
marks  of  X  amount  of  pounds  which  he  had  sent 
to  London  to  meet  his  previous  draft.  This,  of 
course,  assumes  that  rate  of  exchange  and  dis- 
count rate  to  be  invariable.  Now  this  Z  is  just 


32     HOW  GERMANY  DOES  BUSINESS 

the  discount  which  the  London  buyer  of  the  draft 
deducts  from  the  face  value  for  the  time  it  has  to 
run.  If  the  draft  were  renewed  twice,  the  ex- 
porter ultimately  would  have  to  receive  enough 
funds  from  his  Spanish  customer  to  be  able  to 
buy  with  them  a  sight  draft  on  London  of  X  plus 
2  Z  pounds.  When  he  makes  th'e  price  to  his 
Spanish  customer  he  bases  it  on  this  X  plus  to  2  Z 
pounds  translated  into  pesetas,  plus  the  commis- 
sion he  had  to  pay  the  acceptance  house.  As 
credit  in  London  was  very  cheap  for  prime  paper, 
Z  was  a  negligible  item.  In  this  example  I  have 
also  implied  that  the  German  manufacturer  ar- 
ranged for  his  credit  directly  with  the  London 
house.  In  practice,  however,  it  may  have  hap- 
pened that  the  arrangements  were  made  through 
a  German  bank,  the  German  exporter  not  having 
the  slightest  understanding  of  how  the  acceptance 
business  worked. 

All  that  he  had  to  know  was  that  the  banks  were 
willing  to  buy  his  drafts  drawn  on  small  importers 
in  distant  countries  for  a  small  commission,  or 
even  to  advance  money  on  open  accounts  with  their 


IMPORTERS  OF  CREDITS          33 

foreign  customers.  Because  the  bond  between 
the  bank  and  the  firm  was  so  intimate  a  Ger- 
man could  go  even  further  in  its  credit  allowance. 
Sometimes  goods  were  delivered  payable  with  the 
next  order.  This  means  that  when  an  order  was 
given  by  a  client  he  had  to  pay  for  the  outstand- 
ing amount  of  the  previous  order.  This  was  not 
only  a  good  sales  argument,  but,  at  the  same  time, 
something  of  a  perpetual  contract  between  the  firm 
and  client. 

The  reasons  why  the  exporters  did  not  always  -> 
finance  by  a  direct  arrangement  with  an  acceptance 
house  in  London  were  ( i )  because  they  could  thus 
avoid  running  the  risks  of  foreign  exchange  fluc- 
tuations, which  is  more  in  the  domain  of  the 
banker  than  the  merchant;  (2)  because  it  brought 
the  added  advantage  of  differentiation  of  func- 
tions, the  exporter  thus  being  able  to  devote  him- 
self more  strictly  to  his  merchandising  function, 
and  (3)  because  a  bank  could  make  better  terms 
with  a  London  house  on  account  of  its  higher 
credit. 

It  is  to  be  understood  that  Germans  financed 


34    HOW  GERMANY  DOES  BUSINESS 

their  imports  in  the  same  way,  and  very  often  even 
their  own  domestic  trade.  Many  an  industrial  so- 
ciety raised  money  through  banks  which  were 
known  in  Germany  to  carry  a  controlling  interest 
in  industrial  corporations.  Sometimes  the  cor- 
porations were  originally  created  by  banks,  as  in 
the  case  of  the  Disconto  Gesellschaft,  which  pro- 
moted and  controlled  a  number  of  industrial  and 
other  companies.  This  was  made  possible  by  the 
same  finance  bills,  in  this  case  called  "kite-fliers." 
Not  only  the  funds  of  London's  money  market  but 
those  of  small  banks  in  countries  such  as  Switzer- 
land and  Norway  were  used.  Idle  funds  accu- 
mulating there  were  used  in  investments  in  these 
kite-fliers,  indefinitely  renewed.  A  finance  bill 
does  not  show  on  its  face  whether  it  represents  a 
commercial  transaction,  a  loan  operation,  or  pure 
speculation. 

A  certain  German  bank  used  to  send  circulars  to 
Russian  concerns  offering  to  finance  their  imports 
or  exports  by  accepting  drafts,  stipulating  the 
amount  of  the  "revolving"  credit  allowed.  In 
order  to  take  advantage  of  the  difference  in  Rus- 


IMPORTERS  OF  CREDITS          35 

sian  and  German  money  rates  the  bank  even  of- 
fered to  discount  their  outstanding  accounts  by  the 
same  instrumentality  of  the  acceptance  draft 
which  was  afterwards  bought  by  Russian  banks. 
By  lending  its  credit  in  a  foreign  country  to  some- 
times middle-class  business  men  of  good  standing, 
the  German  bank  created  additional  profits  with- 
out increasing  its  visible  credit  liabilities.  But 
that  was  possible  thanks  to  the  wonderfully  organ- 
ized German  information  agencies,  which  guaran- 
teed their  reports. 

In  this  intelligent  use  and  appropriation  of  for- «» 
eign  money  in  which  Germany  indulged  lavishly  —• 
in  order  to  bring  abundant  financial  resources  to 
her  trade  and  industry,  lies  one  of  the  chief  fac- 
tors to  which  Germany  owes  her  development  as 
an  economic  power.  We  can  point  out  an  anal- 
ogy in  the  recent  history  of  the  United  States 
whose  prosperity  is  largely  due  to  the  great  fi- 
nancial facilities  offered  to  her  by  foreign  buyers, 
in  placing  orders  on  credit  often  irrevocable,  and 
sometimes  even  paying  in  advance.  This  ren- 
dered American  industry  independent  of  the  lim- 


36     HOW  GERMANY  DOES  BUSINESS 

ited  financial  structure  of  the  United  States  and 
allowed  the  latter  to  develop  to  the  fullest  extent 
of  her  potential  industrial  forces.  Analogically, 
Germany's  example  shows  what  can  be  achieved 
by  a  country  which,  though  not  possessing  great 
financial  resources,  nor  having  clients  willing  to 
open  ' 'irrevocable"  credits,  yet  knows  how  to  turn 
the  international  financial  machinery  to  her  ad- 
vantage so  as  to  leave  the  industrial  and  commer- 
cial forces  free  from  financial  limitations.  The 
difference  between  the  experience  of  Germany  and 
«*  the  United  States  is  that  Germany  had  to  take 
the  trouble  of  finding  these  financial  facilities  by 
opening  exporters'  credits,  while  in  the  case  of 
America,  these  facilities  were  offered  generously 
by  the  buyers,  i.e.,  the  credits  were  opened  by  the 
importers. 


VI 


CLEAN  CREDITS  OPENED  BY  THE  EXPORTER  WITH- 
OUT THE  IMPORTER'S  KNOWLEDGE 

THE  following  typical  example  will  disclose  some 
interesting  features  of  German  financing  of  their 
foreign  trade.  The  illustration  of  this  method  is 
in  a  line  in  which  American  exporters  are  inter- 
ested, that  is,  in  the  shoe  business. 

The  house  of  N.  sent  its  travelling  agent  to  Rus- 
sia. Before  starting  out  on  the  road,  he  had  in 
his  possession  a  list  of  towns  with  which  the  fac- 
tory regarded  it  as  worth  while  to  do  business. 
This  list  contained  the  names  of  a  large  number 
of  very  small  towns,  some  of  which  were  often 
unknown  to  exporters  of  other  countries.  It  was 
compiled  either  by  the  factory's  own  research  de- 
partment or  by  a  special  agency  called  "The  Shoe 
Intelligence  Agency,"  which  gathered  all  the  data 
concerning  its  line  in  its  own  country  as  well  as 
abroad.  This  agency  or  study  department  was, 

37 


38    HOW  GERMANY  DOES  BUSINESS 

for  instance,  in  touch  with  the  large  shoe  markets 
in  Russia,  such  as  Warsaw.  Its  Warsaw  corre- 
spondents could  easily  advise  them  as  to  the  Rus- 
sian towns  in  the  Warsaw  shoe  market  known  for 
their  good  taste,  for  buying  fine,  expensive  styles, 
etc. 

Shoe  jobbers  being  almost  unknown  in  Russian 
cities,  when  the  travelling  agent  arrived  in  a  town 
mentioned  on  his  list,  he  had  but  to  walk  through 
the  principal  streets,  in  order  to  ascertain  which 
were  the  most  important  shoe  stores.  This  in- 
spection would  also  instruct  him  somewhat  as  to 
the  standing  of  the  store-keepers.  Experience 
had  long  since  taught  him  that  appearances  reveal 
very  much  of  the  resources,  ability  and  character 
of  the  proprietor.  A  quick  glance  at  the  show 
windows,  at  the  exterior  of  the  store,  as  well  as 
at  the  degree  of  animation  within  the  shop,  at  the 
movement  of  customers,  at  perhaps  the  happy  dis- 
order of  boxes  not  yet  arranged,  nor  put  in  their 
places,  all  told  this  sharp-eyed  man  a  detailed  and 
truthful  story  as  to  whether  the  people  were  busy, 
prosperous  or  dull. 


CREDITS  OPENED  BY  EXPORTER    39 

Thus  the  travelling  agent,  after  his  first  round, 
made  a  list  of  the  shoe  merchants  whom  he 
judged  it  advisable  to  visit.  The  following  day  he 
went  to  the  biggest  commercial  bank  of  the  city, 
submitted  his  list  to  an  officer  of  the  credit  de- 
partment and  explained  that  these  were  the  con- 
cerns with  which  his  factory  intended  to  do  busi- 
ness. He  then  told  the  bank  that  they  were  go- 
ing to  sell  on  credit  by  drawing  a  time  draft  on 
the  buyers.  The  factory  requested  this  bank  to 
present  the  drafts  for  acceptance  and  buy  them 
when  accepted.  The  agent  was  anxious  to  know 
which  names  among  those  selected  were  good 
enough  to  be  discounted  by  the  bank  without  hesi- 
tation, and  also  to  know  the  maximum  amount  of 
every  draft.  Frequently  the  travelling  agent  got 
in  touch  with  a  so-called  Credit  Committee,  and 
quickly  learned  all  the  most  reliable  information 
from  people  who  were  considered  the  fathers  of 
the  town.  After  a  short  conversation  he  knew 
many  interesting  things  concerning  the  town  and 
its  business,  as  such  things  are  usually  freely  told 
to  foreigners,  in  hope  of  helpful  advice. 


40    HOW  GERMANY  DOES  BUSINESS 

Now  he  had  not  only  his  own  judgment,  which 
was  necessarily  based  on  superficial  appearances, 
but  one  which  was  essentially  conservative",  though 
he  had  acquired  it  in  such  a  simple  way;'*  But  he 
had  more.  He  had  the  money  with  which  to  fi- 
nance the  exports,  since  the  bank  had  agreed  to  buy 
drafts  drawn  on  certain  merchants.  He  could 
even  make  a  contract  with  the  bank  to  sell  it  a 
"future  of  rubles"  and  to  buy  a  "future  in  marks." 
By  this  arrangement  he  protected  himself  against 
fluctuations  of  exchange. 

Having  solved  the  financial  difficulty  of  the 
problem  and  having  sold  the  "future  rubles"  at  a 
fixed  rate  of  exchange  in  marks,  he  could  now 
quote  prices  in  rubles.  He  could  quote  them  c.i.f. 
town  of  buyer,  already  knowing  the  freight,  cus- 
tom duties  and  other  expenses,  banker's  commis- 
sion, etc. 

With  the  list  of  merchants  now  approved  by 
the  banker,  he  would  begin  his  visits.  He  would 
go  to  the  buyers  and  invite  them  to  examine  his  set 
of  samples. 

At  the  time  when  the  American  style  of  shoe 


CREDITS  OPENED  BY  EXPORTER  41 

became  very  popular  in  European  markets,  Rus- 
sian dealers  were  eager  to  have  American  shoes  in 
their  stores.  As  the  prices  for  American  shoes 
were  very  high,  because  they  were  sold  chiefly 
through  Germany,  Russian  merchants  could  not 
afford  to  buy  them,  and  satisfied  themselves  with 
Russian  hand-  or  machine-made  imitations  of 
American  styles.  By  this  time  the  well  informed 
German  travelling  agent  had  a  new  selling  argu- 
ment. He  pretended  that  his  shoes  were  original 
and  genuine,  manufactured  by  an  "American"  fac- 
tory in  Germany,  for  the  sake  of  cheapness.  As 
these  shoes  bore  no  sign  whatsoever,  and  had  not 
the  fatal  "Made  in  Germany"  label,  the  decep- 
tion could  easily  be  sustained. 

Moreover,  foreign  goods  imported  into  Russia, 
bear  a  special  mark  of  their  importation.  This 
mark  consists  of  a  small  bid  plumb  which  is  at- 
tached to  the  two  ends  of  a  thread  pushed 
through  the  leather  material  and  which  bears  the 
words  "Russian  Custom  House."  Thus  foreign 
goods  show  that  they  are  imported,  but  do  not 
show  where  they  are  imported  from.  The  travel- 


42    HOW  GERMANY  DOES  BUSINESS 

ling  agent  was  aware  of  all  these  little  things. 
The  Russian  merchant  might  not  always  have  be- 
lieved what  the  travelling  agent  told  him ;  he  knew 
however,  that  in  his  turn  he  could  pass  this  fake 
on  to  the  consumer,  since  there  was  no  proof  what- 
soever to  the  contrary.  He  was  of  the  opinion, 
with  some  German  philosophers,  that  truth  is 
only  a  relative  matter  and  is  no  more  than  a 
judgment  that  does  not  bring  one  to  contradic- 
tions. 

The  shoes  of  an  "American  Shoe  Company," 
whatever  the  mark  might  be,  were  a  great  induce- 
ment to  the  buyer.  Later  on>  when  the  travelling 
agent  quoted  his  prices,  often  cheaper  than  those 
of  domestic  manufacturers,  promising  at  the  same 
time  quick  and  accurate  deliveries,  agreeing  to  pay 
all  expenses  till  the  arrival  of  the  shoes  at  the 
buyer's  town,  and  lastly,  offering  liberal  credits 
without  taking  a  promissory  note,  which  is  the 
customary  credit  instrument  in  Russian  domestic 
trade,  the  buyer  naturally  gave  an  order.  The 
agent  explained  the  use  of  the  acceptance  draft 
and  the  buyer  understood  that  with  this  document, 


CREDITS  OPENED  BY  EXPORTER    43 

instead  of  promissory  notes,  the  factory  showed 
him  confidence  and  did  him  a  favor. 

It  may  now  be  understood  why  Germans 
booked  all  the  orders  they  wished.  It  can  be  as- 
serted that  fully  seventy-five  per  cent,  of  "Amer- 
ican Shoes"  sold  in  Russia  were  made  in  Germany; 
the  other  twenty-five  per  cent,  were  chiefly  sold 
through  Germany. 

This  example  is  typical,  though  it  is  taken  in 
a  line  where,  in  spite  of  high  duties,  the  country, 
because  of  peculiar  features  of  the  Russian  shoe 
and  leather  market,  to  which  I  shall  refer  else- 
where, had  to  depend  largely  on  foreign  importa- 
tions increasing  every  year.  The  method  used 
by  Germany  in  the  shoe  business  may  be  applied 
to  other  articles  in  competition  with  England, 
France,  America,  etc. 

When  the  profit  seemed  to  warrant  it,  a  liberal 
open  account  was  granted  to  the  buyer.  Some- 
times it  is  incomprehensible  how  Germany  could 
so  easily  venture  to  work  on  open  account  terms, 
with  a  customer  in  a  distant  foreign  country. 
There  is,  however,  no  essential  difference  between 


44    HOW  GERMANY  DOES  BUSINESS 

a  sale  on  a  draft,  and  on  an  open  account.  The 
difference  will  appear  even  smaller  when  it  is 
borne  in  mind  that  drafts  were  often  drawn 
"Without  Protest."  In  this  case  the  repudiation 
of  the  draft  has  the  same  legal  consequences  as 
the  refusal  to  liquidate  the  open  account.  A  mer- 
chant likely  to  deceive  would  not  be  recommended 
by  the  bank,  and  would  not  receive  a  favorable  re- 
port from  an  information  agency.  He  would 
eventually  betray  his  intentions  in  a  number  of 
ways  when  in  personal  contact  with  the  agent,  for 
instance,  buying  indiscriminately,  without  being 
urged  by  the  salesman,  as  is  the  case  when  goods 
are  bought  without  the  intention  of  paying  for 
them.  If  among  the  number  of  the  customers, 
there  would  be  some  dishonorable  merchants  on 
whom  both  the  information  bureau  and  the  bank 
had  given  favorable  reports,  they  could  just  as 
well  repudiate  the  draft  when  presented  for  ac- 
ceptance. On  the  other  hand,  if  unfortunate  cir- 
cumstances forced  a  customer  to  dishonor  his  open 
account  debts  at  maturity,  the  same  might  have 
happened  to  his  accepted  draft. 


CREDITS  OPENED  BY  EXPORTER    45 

But  what  was  this  very  clever  arrangement,  in 
its  financial  aspect?  It  was  a  kind  of  uncon- 
firmed clean  credit  opened  by  the  exporter^  with' 
out  even  the  knowledge  of  the  importer. 

It  was  clean  because  no  document  secured  the 
draft,  nor  collateral  of  any  kind.  It  was  uncon- 
firmed because  no  written  document  of  the  advice 
and  willingness  of  the  bank  to  discount  drafts 
drawn  on  the  importer  existed.  I  say  it  was  a 
kind  of  such  credit,  because  usually  such  credits 
are  opened  by  the  importer  and  not  by  the  ex- 
porter. In  the  last  point  lies  the  inventive  genius 
of  the  combination.  It  could  be  said  that  Ger- 
mans, having  studied  the  problem  with  their  char- 
acteristic thoroughness,  taking  into  consideration 
the  smallest  details,  as  well  as  the  conditions  of 
time  and  place,  have  willingly  assumed  all  the 
bothersome  functions  of  the  merchant,  surround- 
ing him  with  a  net  of  facilities  and  inducements, 
and  leaving  open  to  him  only  one  course,  a  course 
he  could  not  help  but  step  into,  in  other  words  to 
give  an  order. 


VII 

GERMANY'S  MERCHANT  MARINE 

GERMANY  early  understood  that  to  own  a  pow- 
erful merchant  marine  is  a  condition  sine  qua  non 
for  a  country  which  aspires  to  become  a  prominent 
factor  in  international  trade.  It  is  a  fact  to  which 
she  gave  too  much  publicity  for  it  not  to  be  known. 
It  is  not  necessary  to  expatiate  here  upon  this  sub- 
ject. However,  in  order  to  give  a  clear  idea  of 
her  progress  as  a  sea-power,  these  brief  statistics 
will  be  sufficient: 

From  1886  to  1908,  her  commercial  tonnage 
rose  from  298,000  tons  to  1,982,000,  almost 
seven  times  its  former  capacity. 

Clearings  of  German  vessels  at  German  ports 
only  and  bound  for  foreign  ports  rose  from  7,900,- 
ooo  tons  in  1883  to  66,000,000  tons  in  1906, 
more  than  eight  times  their  quantity. 


46 


VIII 

EXPORT    ARTICLES 

THE  Germans  did  not  stop  at  their  expansion 
of  international  branch  banking,  credit  facilities, 
at  their  discovery  of  a  new  class  of  importer,  nor 
at  the  building  of  their  own  merchant  marine. 
They  went  further.  They  discovered  new  arti- 
cles for  sale. 

The  most  characteristic  feature  of  their  export 
trade  was  a  huge  mass  of  articles  of  export,  such 
as  were  often  absolutely  unknown  in  Germany  and 
manufactured  for  the  sole  use  of  the  foreign  coun- 
tries or  regions  of  a  country,  in  accordance  with 
their  national  needs,  studied  in  advance. 

When  the  English  salesman  came  back  from  a 
business  trip  with  his  melancholy  assertion  that 
there  was  nothing  to  do  with  a  certain  country  for 
his  manufacturer's  goods,  the  Germans  worded 
the  same  impression  otherwise.  They  said: 

47 


48     HOW  GERMANY  DOES  BUSINESS 

"The  country  needs  such  and  such  things.  Can 
we  offer  them?"  While  the  Englishman  looked 
to  see  if  there  was  anything  doing  in  his  line  of 
business,  the  German  looked  to  see  what  line  of 
business  there  was  in  which  he  could  do  some- 
thing. He  was  willing  to  adapt  samples  and  to 
undertake  the  manufacture  of  articles  for  which 
he  himself  had  no  use  in  his  own  country.  It  was 
a  difference  of  point  of  view  of  great  consequence 
to  the  exporter.  The  German  discounted  the  pos- 
sibilities and  opportunities,  the  Englishman,  on 
the  contrary,  was  more  on  the  side  of  conservatism 
and  statics. 

An  authentic  story  is  reported  by  Prof.  Henri 
Hauser  of  the  University  of  Dijon.  In  his  town 
mustard  trays,  representing  pigheads  in  Prussian 
casks  were  on  sale.  German  diplomacy,  becom- 
ing aware  of  this  lese-Prussian  fact,  made  a  pro- 
test. The  ensuing  investigation  showed  that  the 
trays  came  from  Germany.  A  French  dealer, 
bothered  by  the  incessant  visits  of  a  German  trav- 
eller, to  get  rid  of  him,  gave  this  order  which  was 
accurately  executed. 


EXPORT  ARTICLES  49 

The  German  went  to  a  country  with  the  con-  ' 
fident  idea  of  doing  business,  some  business,  and 
since  there  is  business  in  every  country,  he  was 
sure  of  success,  because  he  was  willing  to  satisfy 
the  buyer  as  to  conditions  and  terms.  What  he 
had  to  do  was  to  find  out  what  goods  in  his  line 
were  needed  and  for  which  there  was  already  a 
demand,  or  for  which  a  demand  could  easily  be 
created.  Whenever  such  goods  could  not  be  man- 
ufactured by  himself  he  was  ready  to  buy  them 
in  any  other  country  in  order  to  make  sales  as  a 
broker.  The  English  exporter  sent  his  samples, 
very  often  unwillingly,  in  an  inadequate,  haphaz- 
ard form,  and  was  deeply  dissatisfied  when  people 
abroad  failed  to  recognize  the  usefulness  of  such 
goods.  It  seems  so  simple,  the  idea  that  where 
there  are  merchants  there  is  a  demand  for  goods, 
and  that  the  whole  trouble  is  reduced  to  the  ques- 
tion whether  the  exporter  is  willing  and  able  to 
provide  the  people  with  the  goods  wanted,  and 
under  the  conditions  acceptable  to  them.  How- 
ever, this  idea  was  overlooked  by  many  a  man 
who  tried  to  establish  foreign  connections.  How 


50    HOW  GERMANY  DOES  BUSINESS 

many  found  it  ridiculous  to  build  plants  for  man- 
ufacturing goods  for  which  there  is  no  domestic 
market!  A  French  textile  manufacturer,  for  in- 
stance, refused  an  order  because  the  customer 
wished  to  have  a  special  shade  of  dye,  being  afraid 
that  he  could  not  dispose  of  his  goods  in  France, 
should  some  complications  force  him  to  take  the 
goods  back.  Only  the  Germans  considered  a  for- 
eign market  as  an  individual  body,  which  must  not 
be  subordinated  to  considerations  and  ideas  of  a 
different  body,  their  domestic  interior  market. 


IX 

REDUCING   THE    BUYER'S    EFFORT   TO   THE 
MINIMUM 

IT  will  always  be  true  that  in  our  transactions 
with  other  people,  in  order  to  get  the  most  profit 
for  ourselves,  we  must  think  more  of  the  other 
and  less  of  ourselves.  That  was  Germany's 
psychological  policy,  and  it  will  be  found  in  the 
smallest  details  and  technicalities  of  her  work  in 
international  trade  and  finance.  It  was  in  Ger- 
many's readiness  to  satisfy  any  reasonable  demand 
of  the  customer.  It  was  in  the  adequate  packing, 
in  prompt,  accurate  deliveries  and  shipping;  in 
punctilious  performance.  It  was  also  in  the  scru- 
pulous observation  of  their  promises;  in  the  stand- 
ardized methods,  in  their  general  business  honesty, 
in  the  interest  they  took  in  their  customers;  in 
their  advising  and  enlightening  them,  etc.  It 
was,  before  all,  in  the  courtesy  of  not  only  re- 
si 


52     HOW  GERMANY  DOES  BUSINESS 

framing  from  sending  to  a  country  a  man  un- 
familiar with  its  language,  or  of  sending  one 
speaking  the  language  but  without  business  edu- 
cation, at  least  concerning  his  line,  as  did  other 
people;  but  of  avoiding  as  well  corresponding 
in  any  other  language  than  the  buyer's.  It  was, 
however,  mostly  and  chiefly  in  the  custom 
of  quoting  prices  c.i.f.  town  of  buyer,  and  in  his 
money,  thus  giving  him  an  exact  idea  as  to  the 
total  cost,  an  advantage  which  other  importers 
overlooked.  Many  instances  are  known  in  which 
Germans  took  c.i.f.  orders  at  higher  prices  when 
other  offers  were  rejected,  because  of  f.o.b.  quo- 
tations of  the  competitor.  The  Germans  felt 
obliged  to  give  these  accommodating  quotations, 
because  they  could  not  expect  the  customer  to 
have  a  sufficient  knowledge  of  freights,  insurance, 
custom  tariffs,  and  foreign  exchange.  It  cost 
them  less  to  solve  these  questions,  and  they  could 
charge  less  for  this  service,  because  it  was  dupli- 
cated for  a  given  country  in  a  given  line  of  goods. 
Besides,  reducing  the  effort  of  the  buyer  to  the 
minimum,  leaving  to  him  his  only  natural  func- 


REDUCING  THE  BUYER'S  EFFORT     53 

tion — selling — and  taking  up  all  others,  such  as 
the  custom  broker's,  the  commission  merchant's, 
who  previously  bought  for  cash  and  resold  on 
credit  to  the  merchants,  they  made  the  dealer  more 
or  less  independent  in  his  function  of  merchandis- 
ing and  opened  his  way  to  success.  So  they  abol- 
ished the  wall  between  foreign  and  domestic  trade. 
If  differences  between  foreign  and  domestic  trade 
existed,  they  were  very  often  to  the  advantage 
of  the  German  exporter,  who,  as  a  rule,  used  high 
business  and  moral  standards,  which  the  Germans 
early  found  to  be  a  well-paying  advertisement. 
Thus,  the  Germans  not  only  made  clients  out  of 
small  dealers  in  a  little  town  in  a  distant  country, 
which  had  never  before  even  dreamt  of  importing 
goods  for  their  stores,  but  they  made  friends. 
They  taught  them  business  and  banking  and  de- 
veloped the  country.  That  is  why  I  was  not 
surprised  to  find  in  certain  business  classes  in  Spain 
a  rather  deep  sympathy  with  Germany.  They 
repeatedly  expressed  their  astonishment  at  the  in- 
consistency of  Germany's  military  actions  and 
morals,  and  regretted  that  such  intelligent  people 


54     HOW  GERMANY  DOES  BUSINESS 

could  be  so  easily  made  the  victim  of  dynastic 
ambition  and  domineering  madness. 

In  contrast  with  these  German  methods  of 
trade,  I  remember  a  Rostoff,  Russia,  buyer  who 
came  to  Paris  trying  to  establish  direct  connec- 
tion with  France,  for  the  sake  of  buying  French 
goods  and  of  substituting  French  for  German 
goods.  He  was  introduced  to  prominent  manu- 
facturers, but  was  unable  to  conclude  an  agree- 
ment because  the  French  insisted  upon  cash  deal- 
ings at  the  beginning.  He  was  furious  and  said : 
"I  leave  my  business,  incur  expenses,  come  to 
Paris  and  this  is  what  they  tell  me.  .  .  .  Ger- 
mans send  people  to  us  and  offer  any  accommo- 
dations we  want.  The  French  do  not  want  cus- 
tomers, they  are  rich."  However,  he  established 
some  connections  later  on,  but  curious  to  say,  they 
were  all  of  foreign  origin — Swiss  and  Alsatian. 


X 

GERMANY'S  ECONOMIC  EXPANSION  AS  A  BENE- 
FICIAL FACTOR  IN  INTERNATIONAL  DEVELOP- 
MENT 

GERMANS  taught  business  to  their  customers, 
showed  them  how  to  become  importers,  intro- 
duced highly  specialized  instruments  of  banking, 
and  opened  the  eyes  of  their  customers  to  a  world 
of  things  they  had  not  seen  before.  Germans 
introduced  fixed  prices,  communicated  to  their 
customers  some  sound  principles  of  buying. 
They  helped  them  to  solve  their  problems  of 
salesmanship,  taught  them  publicity  methods, 
and  sound  merchandising.  Germans  themselves 
made  the  most  intelligent  use  of  the  "card  index 
system,"  the  travelling  salesman  like  the  office 
manager,  and  they  introduced  it  to  their  buyers. 
All  this  was  not  for  charity's  sake,  but  because 
they  soon  understood  that  their  prosperity  had 

55 


56     HOW  GERMANY  DOES  BUSINESS 

only  one  basis,  namely,  the  prosperity  of  their 
buyers. 

To  be  sure,  behind  all  these  facilities  so  gener- 
ously offered,  were  a  number  of  problems,  cares 
and  troubles,  which,  however,  they  kept  to  them- 
selves. Arrangements  with  banks,  study  of  cus- 
tom duties,  freight  and  insurance  rates,  interna- 
tional law,  etc.,  were  the  problems  they  had  to 
study  and  to  solve.  Sometimes  they  kept  their 
own  custom  brokers  in  a  distant  port  or  land  fron- 
tier. The  duty  of  these  custom  brokers  was  to 
clear  and  pay  the  duties,  to  forward  the  mer- 
chandise to  the  customer,  pay  the  inland  freight, 
etc.  There  were  very  often  manufacturing 
troubles,  since  they  did  not  sell  standard  articles 
only.  The  cheapness  for  which  German  goods 
are  famous  lay  in  the  fact  that  the  Germans,  like 
the  Americans,  indulged  more  and  more  in  manu- 
facturing on  a  big  scale,  although  they  did  not  go 
as  far  as  the  Americans,  among  whom  it  is  com- 
mon to  refuse  an  order  which  slightly  departs 
from  the  standard.  The  Germans  combined  the 
old  method  of  manufacturing  with  the  new. 


GERMANY'S  EXPANSION  57 

They  often  consented  to  make  some  changes  in 
the  fabrics,  according  to  the  desire  of  the  cus- 
tomer. Sometimes  they  could  foresee  these  pos- 
sible changes,  and  so  stabilize  them  along  stand- 
ardized lines;  for  instance,  a  shoe  manufacturer 
would  consent  to  change  the  heel  in  a  certain 
sample,  but  not  the  toe.  They  could  easily 
standardize  these  probable  changes,  all  the  more 
easily  because  they  knew  all  about  the  tastes  and 
needs  of  the  country. 

The  very  composition  of  the  travelling  sales- 
man's set  of  samples  was  interesting.  It  was 
so  distributed,  that  one  sample  had  one  color  and 
style,  the  other  another  color  and  different  fea- 
tures of  fashion,  etc.,  and  so  in  a  small  number  of 
samples,  a  big  combination  of  styles  and  colors 
was  offered.  In  cases  where  a  change  was  re- 
quested, such  as  was  not  foreseen  by  the  stand- 
ard changes,  the  order  was  taken  conditionally, 
subject  to  the  rejection  of  the  manufacturer. 


XI 

THE  EXPORT  OF   MEN 

IN  the  early  history  of  English  export  the  ex- 
port of  capital  went  hand  in  hand  with  the  export 
of  goods  and  men,  as  we  see  in  the  example  of 
railroad  building  by  English  capital  and  English 
labor.  Though  conditions  have  changed  a  great 
deal  since,  it  often  proves  profitable  when  ex- 
porting capital  to  recur  to  the  old  system  of 
exporting  men  with  it. 

It  is  asserted  that  the  Deutsche  Export  Review 
in  a  confidential  supplement  propagated  the  idea 
of  exporting  men  as  the  most  efficient  method 
of  exporting.  Some  people  see  in  it  an  indica- 
tion of  Germany's  military  preparedness;  how- 
ever, it  is  possible  that  it  was  a  simple  business 
expedient.  The  usual  modern  form  of  export 
of  men,  is  the  establishment  of  branch  offices. 

Branch  offices  are  frequently  an  efficient  ad- 
58 


THE  EXPORT  OF  MEN  59 

junct  of  foreign  trade,  because  they  strengthen 
the  position  of  the  exporter  and  make  him  fear 
competition  less.  In  one  case,  when  an  English 
exporter  did  business  for  a  long  time  with  a  cer- 
tain foreign  client,  without  even  visiting  the  mar- 
ket, he  suddenly  lost' his  trade.  When  he  inves- 
tigated, he  learned  that  a  German  competing 
concern  had  opened  a  branch. 

A  branch  offers  advantages  of  time  and  place.] 
As  it  is  in  immediate  touch  with  the  customer, 
it  can  more  efficiently  deal  with  him  and  con- 
trol his  credit  standing.  In  other  cases,  it  offers 
the  advantage  of  general  stock,  and  especially  of 
parts  for  replacement.  This  is  why  a  branch 
can  be  used  as  a  strong  selling  point  in  itself, 
when  previously  the  merchant  had  to  wait  for  a 
small  part  to  be  replaced  from  abroad.  When 
such  a  branch  is  opened,  it  offers  the  advantage 
of  immediate  distribution.  But  soon  it  auto- 
matically pushes  aside  other  foreign  suppliers, 
because  the  merchant  in  order  to  secure  separate 
parts  has  to  buy  his  machines,  typewriters,  from 
the  branch,  and  continue  to  deal  with  it. 


60     HOW  GERMANY  DOES  BUSINESS 

It  is  curious  to  note  that  a  firm  in  Germany 
manufactured  types  for  all  makes  of  typewriters, 
and  it  had  a  real  monopoly  for  this  in  the  whole 
world.  When  an  Underwood  machine  had  to 
have  a  Latin  type  changed  into  Russian,  for 
instance,  the  type  could  be  bought  much  more 
cheaply,  easily  and  more  quickly  from  this  Ger- 
man concern,  than  from  the  Underwood  Type- 
writer Co.  itself.  German  brokers  in  typewrit- 
ers had  the  monopoly  for  the  type,  thanks  to 
this  German  concern.  They  could  thus  more 
quickly  and  more  easily  substitute  one  type  for 
another,  and  thus  offer  greater  advantages  to  the 
public.  Later  they  used  this  influence  to  intro- 
duce their  own  makes,  the  Adler  machine,  etc. 

Besides  maintaining  branches,  Germany  devel- 
oped a  network  of  agents,  frequently  of  German 
origin.  The  agency  system  varies  according  to 
places  and  purposes.  Usually  the  agent  started 
as  a  solicitor  and  worked  on  a  commission  basis. 
In  order  to  protect  themselves  from  a  loss,  the 
manufacturers  and  exporters  used  the  Del  Cre- 
dere system  by  which  the  agent  bore  a  responsi- 


THE  EXPORT  OF  MEN  61 

bility  of  say  twenty-five  per  cent,  of  the  amount 
of  the  order  in  case  of  failure  of  the  client.  This 
made  him  careful  in  accepting  orders.  An  order 
sent  by  such  an  agent  was  not  accepted  however, 
until  a  credit  information  bureau  gave  a  favor- 
able report  on  the  house. 

The  agent  could  eventually  become  a  consignee 
exhibitor  to  whom,  when  it  proved  necessary,  for 
reasons  of  stock  advantages,  custom  duties,  etc., 
consignments  were  sent.  Sometimes  he  was  at  a 
terminal  point  where  large  consignments  were 
sent,  and  had  charge  of  distributing  them  to  cus- 
tomers in  various  towns.  It  would  be  interest- 
ing to  follow  the  prudence  and  sagacity  which 
Germans  used  in  order  gradually  to  build  up  an 
efficient  network  of  agencies.  In  the  chapter  on 
"Export  by  Mail"  we  shall  encounter  an  interest- 
ing agency  device  successfully  practiced  by  the 
Germans. 


XII 

IMITATION    AND    COUNTERFEITING 

IMITATING  and  counterfeiting  may  be  called 
real  German  specialties,  not  because  the  Germans 
are  the  only  people  who  have  imitated  and  coun- 
terfeited the  inventions  of  other  countries,  but 
because  the  Germans  have  won  the  particular  dis- 
tinction of  going  about  imitating  and  counter- 
feiting with  a  degree  of  system  and  method  never 
before  practiced.  Germany  elaborated  a  system 
of  special  agents  to  foreign  countries  to  report, 
among  other  duties,  on  any  novelty  that  was  put 
on  the  market.  With  a  further  eye  to  thorough- 
ness, Germans  were  sent  abroad  to  establish 
themselves  as  workmen  in  factories  where  valu- 
able trade  secrets  could  be  learned.  That  is 
why  Germans  were  very  often  found  working  for 
a  nominal  salary  in  foreign  concerns.  At  home, 
the  Germans  founded  bureaus  for  collecting 

62 


COUNTERFEITING  63 

everything  available  in  print  from  all  the  more 
conspicuous  and  promising  manufacturing  con- 
cerns throughout  the  world.  They  classified 
their  competitors'  advertising  matter — cata- 
logues, circular  letters  and  what  not.  From  the 
data  thus  assembled  they  freely  borrowed  the  ac- 
cumulated results  of  world-wide  ingenuity  and 
experimentation,  and  promptly  turned  to  their 
own  advantage  the  successes  of  their  neighbors. 

The  Germans  were  the  first  to  introduce  for- 
eign novelties  into  foreign  countries  which  for 
various  reasons  could  not  imitate  and  manufac- 
ture these  novelties  for  themselves.  Many  fash- 
ions and  novelties  originating  in  America,  Eng- 
land, or  France,  were  carried  by  the  Germans  into 
distant  countries.  It  was  Germany  that  popu- 
larized in  Europe  many  American  devices  such  as 
safety  razors,  office  furniture  and  appliances,  and 
machinery.  When  they  found  a  good  market 
for  such  foreign  novelties,  they  at  once  set  to  work 
to  manufacture  the  wares  themselves. 

German  firms  were  eager  to  represent  foreign 
houses  in  foreign  countries,  and  it  is  safe  to  say 


64     HOW  GERMANY  DOES  BUSINESS 

that  a  great  portion  of  the  world's  intermediate 
trade  was  carried  on  by  them. 

In  such  countries  as  Russia,  for  instance, 
America  has  only  lately  begun  to  establish  her 
own  agencies,  having  formerly  carried  on  her 
trade  through  the  mediation  of  Germans  in  Rus- 
sia, or  even  through  German  agencies  domiciled 
in  Germany.  This  state  of  affairs  was  not  pecul- 
iar to  America,  however,  for  to  some  extent  Eng- 
land and  even  France  acted  through  Germany 
in  their  commerce  with  Russia. 

The  reason  for  this  is  not  far  to  seek.  The 
Germans  were  always  on  the  alert  to  offer  their 
services  to  foreign  firms  even  before  these  firms 
thought  of  adventuring  in  business  in  foreign 
fields.  Usually  the  Germans  contracted  for  a 
representation  with  a  given  minimum  yearly 
turn-over  of  business,  and  offered,  besides,  other 
easy  and  attractive  conditions  with  the  result  that 
exclusive  representation  was  quickly  granted 
them.  Sometimes  this  representation  was  over 
an  enormous  territory,  including  several  coun- 
tries. For  the  Germans  knew  well  the  weak 


COUNTERFEITING  65 

points  of  their  foreign  manufacturing  competi- 
tors: a  fear  of  assuming  risks  in  foreign  markets 
because  of  provincial  commercial  experience. 
The  Germans  offered  assurance  against  such  tim- 
idity, and  so  obtained  for  themselves  the  trade 
rights  that  they  coveted. 

Moreover,  foreign  branches  in  certain  coun- 
tries were  often  organized  by  Germans.  One  of 
the  largest  American  factories  with  a  network 
of  branches  all  over  the  world,  including  Russia, 
had  very  serious  trouble  with  the  Russian  gov- 
ernment a  few  years  ago,  resulting  in  Russia 
closing  a  number  of  these  branches  because  they 
were  reported  as  spy  agencies.  The  truth  was 
that  there  were  hardly  ten  American  members  al- 
together in  these  branches,  the  principal  man- 
agers being  Germans. 

As  for  the  capacity  of  the  Germans  for  imita- 
tion in  the  broad  sense  of  the  word,  this  is  known 
to  everybody.  However,  I  am  reminded  of  a 
typical  instance  that  is  instructive  as  well  as  illus- 
trative. 

In  France,  an  organization  for  promoting  for- 


66     HOW  GERMANY  DOES  BUSINESS 

eign  trade  with  which  I  was  connected,  (the  Mu- 
seum of  Foreign  Samples  Exhibition  it  might  be 
called),  received  an  ingeniously  constructed  slot- 
machine  for  the  distribution  of  sweets.  Strongly 
in  its  favor,  too,  was  its  extreme  cheapness,  the 
machines  selling  for  something  like  a  dollar  each. 
They  were  intended  for  use  in  cafes,  saloons, 
moving-picture  theatres,  barber-shops,  and  other 
much  frequented  places.  With  the  machines  we 
received  a  detailed  account  of  probable  expenses 
and  income,  and  instructions  intended  to  cover 
the  smallest  details  and  to  forestall  all  possible 
contingencies.  The  probable  average  receipts  of 
one  machine  was  based  on  statistics  taken  from 
German  towns  where  the  device'  had  been  used. 
As  there  was  a  small  space  on  the  apparatus  ad- 
jacent to  the  looking-glass,  the  renting  of  this 
space  for  advertising  was  reckoned  as  part  of  its 
revenue-producing  properties.  The  wholesale 
price  of  the  confections  sold  by  the  machine  was 
given,  with  the  stipulation  that  if  the  sweets  cost 
more  in  France,  they  might  be  had  at  the  quoted 
price  direct  from  the  company  in  Germany.  The 


COUNTERFEITING  67 

net  profit  calculated  was  about  300%  per  year. 
A  detailed  plan  of  a  company  to  be  incorporated 
under  the  French  corporation  laws  was  also  given 
and  the  factory  agreed  to  accept  part  payment  in 
stock.  With  an  eye  to  local  customs,  it  was 
stated  that  as  the  slot-machine  habit  was  already 
common  in  France,  (all  kinds  of  gambling  ap- 
paratus of  the  automatic  roulette  type  being  pop- 
ular), the  slot-machine  in  question  should  find  a 
peculiarly  appropriate  soil.  They  argued  for  in- 
stance, "A  young  gentleman,  when  in  a  cafe  with 
a  lady,  would  be  reluctant  to  buy  her  a  two-cent 
piece  of  chocolate,  but  he  would  not  hesitate  to 
give  her  the  money  to  let  her  experiment  with  the 
machine." 

Such  are  some  of  the  details  showing  that  the 
seller  had  studied  the  prospective  class  and 
psychology  of  the  consumer,  a  study  current  in 
every  intelligent  sales  organization.  But  there 
was,  however,  one  point  about  this  slot-machine 
scheme  that  was  very  "German";  the  appara- 
tus was  an  exact  copy,  reduced  in  size,  of  a 
French  postal  letter  box,  painted  in  the  national 


68     HOW  GERMANY  DOES  BUSINESS 

blue  with  the  inscription,  "Not  a  letter,  but  a 
sweet."  It  is  needless  to  say  that  the  contrivance 
did  not  bear  its  original  German  name  but  was 
called  "Distributeur  Frangais,"  the  Germans 
knowing  well  the  moral  opposition  in  France 
against  German  products.  It  must  not  be  con- 
cluded, however,  that  in  all  of  their  foreign  trade 
the  Germans  hide  their  nationality.  In  Spain, 
for  instance,  the  industries,  public  services,  banks, 
etc.,  are  largely  under  German  control. 
"Made  in  Germany"  was  a  real  recommendation 
there.  Under  such  circumstances,  and  in  accord- 
ance with  their  elastic  political  policy,  Germans 
sold  both  their  own  products  and  their  imitation 
of  others',  ostentatiously  under  the  imperial 
eagle. 


XIII 

LITTLE    THINGS    OF    GREAT    IMPORTANCE 

THE  German  exporter  always  printed  cata- 
logues in  the  language  of  the  country  to  which 
he  sent  them,  or  in  several  languages.  There  are 
still  many  people  who  do  not  understand  that 
it  is  a  waste  of  time  to  address  a  foreigner  in 
any  language  other  than  his  own,  for,  even 
though  he  understand  it,  he  comprehends  with 
difficulty,  and  the  message  is  not  as  clear  to  him 
as  when  written  in  his  native  language.  More- 
over, a  catalogue  in  two  different  languages  was 
not  a  mere  copy  from  one  language  into  another. 
It  was  a  real  adaptation,  not  only  in  style  but  in 
substance,  and  in  the  very  selection  of  goods  pre- 
sented. The  adaptation  was  made  according  to 
the  needs  of  the  foreign  buyer.  Thoroughness 
was  disclosed  in  this  feature  as  in  other  work. 
To  show  how  far  they  carried  their  analytical 
69 


yo     HOW  GERMANY  DOES  BUSINESS 

wisdom,  it  suffices  to  mention  that  their  printing 
in  Russian  was  in  clumsy,  big  letters,  easy  to 
read.  That  was  because  Germans  know  that 
the  literacy  of  many  Russian  dealers  does  not  go 
beyond  signing  their  name.  Their  catalogues  in 
French  were  typographically  correct  and  on  good 
paper.  Fine  things  could  be  appreciated  by  the 
French  and  not  as  a  rule  by  the  Russians.  An- 
other point  was  that  they  did  not  give  to  their 
patented  specialties  strange,  almost  unpronounce- 
able names,  so  often  found  in  foreign  catalogues. 
On  the  contrary  the  names  were,  vivid,  suggest- 
ive of  the  article,  sometimes  with  a  touch  of  pa- 
triotic appeal. 


XIV 

EXPORT     PUBLICITY 

THE  Germans  used  publicity  well  and  lav- 
ishly, and  a  great  deal  of  their  success  was  per- 
haps due  to  the  adaptation  of  American  ideas  of 
publicity  in  the  foreign  trade  field.  It  is  true  that 
they  were  not  always  adaptations,  since  the  ad- 
vertisements and  stereotype  cuts  were  sometimes 
simply  copies  from  American  magazines  and 
newspapers.  I  cannot  speak  here  of  all  the  de- 
tails of  this  function  of  advertising  so  rich  in  its 
application  to  foreign  trade,  but  shall  merely 
mention  a  few  points. 

One  point  is  their  use  of  posters,  which  was 
typical  of  German  publicity  methods,  particu- 
larly in  Russia  and  Spain.  I  knew  of  a  German 
drug  manufacturer  who,  when  selling  his  mer- 
chandise in  Russia,  offered  with  it  window-dis- 
play letters  in  Russian.  This  proved  to  be  very 


72     HOW  GERMANY  DOES  BUSINESS 

profitable  to  him,  not  only  so  far  as  publicity 
was  concerned,  but  because  the  Russians  liked 
this  form  of  decoration  and  the  idea  appealed  to 
them. 

It  will  perhaps  be  interesting  to  mention  that 
seventy-five  per  cent.,  if  not  more,  of  all  the 
posters  used  by  candy,  soap,  and  chemical  fac- 
tories in  Russia  were  made  in  Germany.  Two 
or  three  of  the  German  poster  manufacturers  had 
travelling  representatives  in  Russia  in  touch  with 
business;  when  a  new  factory  was  about  to  open, 
they  were  on  hand  to  solicit  orders.  I  know  of 
one  case  where  an  order  was  given  to  a  German 
because  he  agreed  to  accept  payment  in  stock  of 
the  new  concern.  These  representatives  were 
professional  designers  and  artists.  Although 
Germans  copied  largely  American  publicity  de- 
vices, they  never  copied  the  style.  A  German 
house  advertising  in  different  countries  changed 
its  selling  arguments  according  to  the  varying 
conditions  of  time  and  place. 

This  observation  should  be  of  interest  to  the 
American  advertiser  who  evidently  does  not  real- 


EXPORT  PUBLICITY  73 

ize  that  his  American  style  of  advertising,  his 
genius  of  confidence,  optimism  and  exaggeration 
does  not  always  fit  the  modest  and  somewhat 
skeptical  old  world.  I  know  of  a  big  American 
advertising  concern  whose  advertisements  in  Eng- 
lish, French,  Italian  and  Russian  were  merely 
translations  from  one  language  into  the  other. 
The  Germans  never  committed  such  errors. 


XV 

SAVINGS    IN    CUSTOMS    DUTIES 

HAVING  their  research  department  studying 
the  tariff  duties,  they  were  often  able  to  harvest 
the  fruit  of  their  studies  by  effecting  large  sav- 
ings when  quoting  prices  c.i.f.  town  of  buyer, 
which  entailed  paying  the  customs  duties.  A 
manufacturer  of  chemical  specialties,  in  order  to 
elude  the  prohibitive  duties  on  his  goods,  used 
to  send  his  chemicals  in  separate  carboys  as  al- 
leged polish  powder  which  thus  passes  at  a  lower 
tariff.  He  sent  labels  and  bottles  separately, 
also,  which  naturally  passed  at  a  lower  tariff. 
The  bottling  and  labeling  was  done  either  by  a 
representative  in  the  importing  country  or  some- 
times by  the  buyer  himself.  By  these  devices  he 
saved  seventy-five  per  cent,  of  the  customs  duties, 
a  very  important  item  in  the  cost.  In  another 
case,  the  wood  and  metal  parts  of  toys  were  sent 

74 


SAVINGS  IN  CUSTOMS  DUTIES     75 

to  Russia  separately.  The  duty  was  generally 
calculated  on  the  higher  component  and,  as  there 
was  little  metal  and  much  wood,  the  metal  bear- 
ing the  higher  tariff,  the  German  exporter  would 
send  the  wooden  parts  in  one  box  and  the  metal 
pieces  in  another.  When  they  arrived  the  parts 
had  but  to  be  assembled.  In  some  other  in- 
stances Germans  sent  semi-complete  articles  be- 
cause when  sent  finished  they  had  to  pay  a  much 
higher  customs  duty. 

Certainly  they  did  not  begin  doing  all  these 
things  at  the  outset  of  their  work.  Experience 
and  keen  competition  between  them  were  their 
teachers.  It  is  noteworthy  that,  although  they 
were  not  the  only  shrewd  sellers  in  the  field,  they 
were  perhaps  the  only  ones  to  show  a  constant, 
eager  desire  to  get  all  the  obtainable  material  for 
studying  the  manifold  intricacies  of  foreign 
trade.  They  listened  eagerly  to  the  suggestions 
customers  made  to  their  travellers,  and  as  is  al- 
ways true  of  teachers,  they  learned  much  from 
their  customers  while  teaching  them. 


XVI 

EXPORT    BY    MAIL 

AN  example  will  illustrate  the  method  which 
proved  successful  in  German  export  business  by 
mail.  A  German  lace  factory  in  Switzerland  or- 
ganized a  mail  order  business  with  Russia  along 
the  following  lines: 

Russia  was  divided  into  a  certain  number  of 
districts  and  for  each  district  a  general  agent 
was  appointed,  who  in  his  turn  appointed  sub- 
agents.  Samples  of  laces  and  photographs  of 
dresses  and  other  goods  manufactured  by  the 
factory  were  sent  in  quantities,  according  to  the 
requirements  of  the  general  agent  for  his  own 
work  and  for  distribution  among  the  sub-agents. 

Prices  were  quoted  c.i.f.  town  of  buyer; 
twenty  per  cent,  commission  was  allowed  to  the 
agents  on  every  order.  The  twenty  per  cent, 
commission  was  apportioned  by  allowing  fifteen 

76 


EXPORT  BY  MAIL  77 

per  cent,  to  the  sub-agent  and  five  per  cent,  to 
the  general  agent.  The  amount  of  the  com- 
mission could  be  taken  by  a  sub-agent  as  a  de- 
posit. In  case  the  order  came  from  the  general 
agent  the  entire  twenty  per  cent,  was  allowed 
to  him.  The  general  agent  received  a  bonus  of 
from  one  to  two  per  cent,  according  to  his  ac- 
tivity, merits  and  turn-over.  Orders  were  ac- 
cepted in  amounts  from  twenty  rubles  (normally 
$10)  up,  and  in  the  case  of  smaller  orders,  the 
sub-agent  could  combine  them  so  as  to  attain 
the  minimum.  When  the  agent's  commission 
was  taken  as  a  deposit,  the  order  sent  to  the  fac- 
tory was  marked  "full  deposit  taken,"  and  the 
customer  received  the  parcel  at  his  home  by  post, 
c.o.d.  The  parcels  were  sent  to  a  Russian  fron- 
tier town  by  parcel  post,  consigned  to  a  branch 
of  the  factory.  This  branch  cleared  the  customs 
duties  and  forwarded  the  parcels  by  Russian 
mail,  c.o.d.  Thus  the  money,  when  the  parcel 
was  accepted,  was  remitted  to  the  branch  at  the 
Russian  frontier.  It  may  be  surmised  that  many 
obstacles  and  difficulties  had  to  be  overcome  to 


78    HOW  GERMANY  DOES  BUSINESS 

execute  this  business,  because  Russia,  though 
having  international  mail  parcel  post  had  no  ar- 
rangements for  c.o.d.  international  parcels.  It  will 
not  be  without  interest  here  to  recall  the  deliber- 
ations of  one  of  the  allied  economic  conferences 
in  Paris,  at  which  it  was  proposed  that  Russia 
establish  custom  house  branches  in  France,  Mar- 
seilles and  other  towns.  Eventually  such 
branches  will  be  established  in  the  United 
States.  To  one  of  these  conferences  I  sent  a 
memorandum  in  regard  to  the  necessity  of  es- 
tablishing international  c.o.d.  mail  relations  with 
Russia. 

I  made  a  curious  discovery  during  the  life  of 
the  lace  factory.  The  parcel  sent  by  mail  di- 
rectly to  the  Russian  town  (without  c.o.d.) 
proved  to  be  more  expensive  than  when  sent  by 
post  first  to  the  Russian  frontier  town  and  from 
there  by  parcel  post  to  the  Russian  buyer's  town. 

The  advantages  of  the  business  organization 
were  numerous:  the  goods  were  actually  offered 
to  the  buyer  cheaper  than  in  Russian  stores;  de- 
liveries were  quicker  and  more  certain  and  the 


EXPORT  BY  MAIL  79 

choice  wider.  As  to  the  factory,  it  was  fully 
protected  from  credit  risks,  since  the  business 
was  done  on  a  strictly  cash  basis.  If  the  client 
refused  to  accept  his  parcel,  the  agent  and  sub- 
agent  were  both  responsible  for  the  expense  of 
sending  and  returning  the  parcel.  Then,  the 
agent  was  quickly  notified,  and,  in  order  to  avoid 
loss  he  usually  managed  to  dispose  of  the  goods 
somehow.  In  case  he  did  not,  the  factory 
charged  his  account,  which  consisted  of  so  much 
of  his  commission  as  had  not  been  taken  in  ad- 
vance as  deposits.  If  the  number  of  such  re- 
turned parcels  exhausted  the  agent's  commission 
account  and  the  factory's  protection,  the  agent 
was  threatened  with  the  loss  of  his  agency  upon 
the  next  return  of  a  parcel.  That  happened 
rarely,  however,  because  the  agent  in  turn  ex- 
erted pressure  upon  the  sub-agent,  who  also 
risked  his  outstanding  commission.  That  was 
why  the  factory,  agent  and  sub-agent  were  all 
interested  in  taking  the  twenty  per  cent,  in  ad- 
vance whenever  it  was  possible,  because  it  dim- 
inished by  so  much  the  chances  of  the  client's 


8o     HOW  GERMANY  DOES  BUSINESS 

repudiation  of  the  parcel.  But  when  the  client 
did  repudiate  such  a  parcel,  the  sub-agent  usu- 
ally paid  for  it. 

The  commission  accounts  were  balanced  every 
six  months.  In  order  to  avoid  sending  money 
parcels  equalling  the  balance  due  to  the  agent  on 
the  date  of  liquidation  were  sent  free  to  him. 
He  forwarded  them  by  c.o.d.  parcel  post  to  the 
client  and  retained  the  proceeds.  His  expenses 
on  the  c.o.d.  shipments  were  naturally  taken  into 
consideration.  He  then  liquidated  the  commis- 
sion account  of  his  sub-agents. 

In  a  very  few  cases  these  mail  order  export 
factories  used  newspaper  publicity;  they  invited 
inquiries  for  information  as  well  as  for  samples. 
Their  purpose  was  rather  to  back  up  the  work  of 
the  agent  whose  address  was  invariably  given  in 
the  advertisement.  As  the  prices  direct  to  the 
customer  were  the  same  as  those  quoted  by  agents, 
it  was  in  the  clients'  interest  to  order  through  the 
agent.  It  was  anticipated  by  the  factory  that 
eventually  selling  by  advertisement  would  become 
a  more  and  more  important  factor. 


EXPORT  BY  MAIL  81 

It  is  true  that  the  success  of  this  firm  de- 
pended principally  on  the  nature  of  its  goods. 
In  fact,  lace  goods  are  of  light  weight  and  of 
easy  transportation.  In  a  parcel  of  maximum 
weight  accepted  by  the  post,  a  hundred  dollars' 
worth  of  merchandise  could  be  sent  and  thus 
the  percentage  of  the  mail  expenses,  in  relation 
to  the  value  of  the  merchandise,  was  negligible. 
On  the  other  hand  the  advantages  to  this  factory 
were  in  offering  an  article  which  was  not  manu- 
factured in  the  country  and,  as  far  as  concerned 
the  customs  duties,  the  buyer  had  to  pay  for 
them  anyhow,  whether  buying  in  a  store  or  by 
mail. 

Just  because  Russia  was  the  country  where  the 
bulk  of  all  finished  articles  was  of  foreign  origin 
the  field  of  mail  order  business  would  seem  to 
have  been  very  attractive;  but  with  the  lack  of 
business  facilities  as  well  as  of  business  educa- 
tion, mail  order  business  was  resorted  to  by  peo- 
ple in  search  of  easy  profits.  This  field  was  lit- 
erally covered  by  swindlers  of  every  kind. 
Holland  offered  lotteries  by  mail,  France  offered 


82     HOW  GERMANY  DOES  BUSINESS 

all  kinds  of  beautifiers,  life  elixirs  and  especially 
patent  medicines,  for  sexual  diseases,  etc.  Ger- 
man swindlers  even  went  so  far  as  to  offer  mil- 
lionaire brides  for  a  couple  of  rubles. 

One  German  cosmetic  factory,  with  a  branch 
in  Russia,  replied  to  each  inquiry  by  letter  en- 
closing detailed  circulars.  The  inquirer  was 
further  informed  that,  owing  to  the  scarcity  of 
the  chemical  products  entering  into  the  manufac- 
ture of  this  particular  kind  of  cosmetic,  and  that, 
in  order  not  to  deprive  the  inquirer  of  the  op- 
portunity of  having  it,  a  c.o.d.  mail  parcel  would 
be  sent  him  by  the  Russian  branch,  after  say,  five 
days.  A  certain  number  of  days  would  be  al- 
lowed to  elapse  in  order  to  give  the  client  time 
to  write  that  he  would  not  accept  the  parcel.  If 
such  a  letter  was  not  received  at  a  duly  calculated 
time  the  parcel  was  actually  sent.  As  that  was 
an  invariable  policy  for  many  years,  it  may  be 
assumed  that  this  method  of  forced  selling  was 
successful.  In  the  end  its  success  lay  in  the  fact 
that  the  clients  were  beauty  seeking  women,  a 
class  of  buyers  of  weak  will  and  easily  persuaded. 


EXPORT  BY  MAIL  83 

Indeed,  it  was  difficult  to  repudiate  an  elixir  sent 
home  and  which  for  only  a  few  kopecks  promised 
to  give  beauty,  youth  and  happiness. 

A  little  consideration  of  the  future  of  mail 
order  business  in  Russia  will  not  be  out  of  place. 
Russia  finds  herself  in  the  same  geographical  con- 
dition which  assures  the  success  of  the  mail  order 
business  in  the  United  States.  The  large  and 
distant  town  peripheries  and  the  sparseness  of 
these  towns  were  the  necessary  commercial 
conditions  which  brought  to  life  the  mail  order 
business  in  the  United  States.  The  development 
of  the  literacy  of  the  Russian  people  together 
with  the  newspaper  business  put  on  a  commercial 
basis,  as  already  seen  in  the  kopeck  (one-half 
cent)  papers  which  have  existed  in  Russia  for 
the  last  ten  years  and  which  have  every  chance 
of  developing,  will  be  the  moral  stimulant  of 
mail  order  business.  As  Russia  is  now  the  coun- 
try of  the  world's  future  production  of  pulp, 
paper  will  be  cheap  there,  thus  all  the  necessary 
material  conditions  for  the  successful  develop- 
ment of  publicity,  advertising  and  mail  order 


84    HOW  GERMANY  DOES  BUSINESS 

business'  are  in  existence  in  Russia.  As  so  much 
remains  to  be  done  and  done  quickly  in  Russia 
in  the  direction  of  common  and  technical  educa- 
tion, we  may  witness  there  a  great  development 
in  a  new  type  of  home  correspondence  school 
where  the  methods  of  a  purely  American  mail  or- 
der business  will  eventually  be  fertilized  by 
adapting  moving  pictures  and  talking  machine 
devices.  However,  this  is  rather  a  hope  than  a 
prophecy. 


XVII 

THE   COST   OF    LABOR 

THE  cost  of  German  labor,  contrary  to  the  pop- 
ular belief,  was  at  least  as  high  as  in  France  and 
only  a  little  lower  than  in  England.  It  was 
higher  than  in  all  other  countries  of  Europe. 
This  did  not,  however,  prevent  Germany  from 
conducting  business  with  countries  where  labor 
was  incomparably  cheaper, — Italy,  Austria,  Rus- 
sia, Spain,  etc. 

The  item  of  labor  will  enter,  to  the  operative 
cost  of  a  product  in  a  different  proportion  ac- 
cording to  the  kind  of  goods  produced.  The  finer 
the  fabric,  the  more  the  item  of  labor  will  tend  to 
be  a  negligible  quantity.  In  hand-industry  it  will 
naturally  play  a  greater  role.  It  could,  however, 
be  counterbalanced  there  by  the  inefficiency  of 
cheap  labor  and  long  hours,  as  has  been  absolutely 
established.  If  the  item  of  labor  can  certainly  not 

85 


86    HOW  GERMANY  DOES  BUSINESS 

be  neglected  altogether,  it  must  not  be  forgotten 
that  the  role  of  devices,  patents,  successful  expe- 
rience, efficient  methods  of  manufacturing,  and 
methods  of  industrial  engineering,  novelties,  effi- 
cient merchandising  enterprise,  ability,  good  will, 
large  scale  manufacturing,  standardization  and 
other  factors  are  just  as  important.  If  you  will 
add  to  these  the  factors  of  banking  and  credit  ac- 
commodation, information  as  to  shipping  facili- 
ties and  other  general  factors,  as,  for  instance, 
convenient  locations  for  getting  the  necessary  raw 
materials,  labor  and  tools,  governmental  protec- 
tion, you  will  have  a  more  or  less  complete  set 
of  factors  which  will  balance  the  factors  of  labor. 
I  say  more  or  less  because  there  is  still  a  series  of 
factors,  as  for  instance,  the  hypnotical  influence 
in  all  countries  of  the  word  "Imported,"  thanks 
to  which,  an  article,  not  at  all  better  than  a  do- 
mestic one  but  only  a  little  different,  produced  in 
a  country  supposed  to  be  authoritative  in  a  given 
line,  will  be  sold  sometimes  at  double  price. 
This  moral  factor  may  be  neglected  by  an  econ- 
omist, it  cannot,  however,  be  neglected  by  a  busi- 


THE  COST  OF  LABOR  87 

ness  man  who  operates  with  values  smaller  than 
those  of  the  economist,  with  more  limited  periods 
of  time  and  space — strictly  empirical  phenomena. 

In  the  case  where  expensive  labor  is  an  im- 
portant factor  three  things  will  happen,  viz. :  ex- 
port will  tend  to  decrease,  provided  the  importing 
country  is  able  to  get  the  raw  material  as  well  as 
the  technical  and  organization  equipment  as 
cheaply  as  the  exporting  one ;  the  exporting  coun- 
try will  export,  instead  of  merchandise,  factories 
themselves;  or  some  new  devices  will  be  found 
and  adopted,  as  labor-saving  machinery  and  such 
changes  in  the  very  fabric  as  will  allow  the  fac- 
tory to  excel  competitors.  Very  often  the  solu- 
tion will  be  found  in  the  production  of  finer  and 
higher  grades  where  expensive  labor  only  is  neces- 
sary. 

So  it  may  be  seen  that  the  high  cost  of  labor 
is  an  incidental  factor  in  the  operative  cost  of 
goods.  Where  necessity  will  force  export,  an 
adjustment  of  factors  will  possibly  be  made  by 
which  new  export  articles  will  be  created  and  in 
which  the  cost  of  labor  is  not  an  important  item. 


88     HOW  GERMANY  DOES  BUSINESS 

A  few  examples  will  illustrate  the  foregoing  con- 
siderations. Shoes  in  Russia,  (I  speak  of  the 
ante-bellum  time)  have  a  peculiar  aspect.  As 
labor  is  cheap,  handmade  shoes  are,  as  a  rule, 
cheaper  than  manufactured  shoes.  Shoe  manu- 
facture, being  in  its  infancy,  is  conducted  on  an 
inefficient  basis.  There  are  practically  no  kid 
tanneries  in  Russia  and  very  little  of  box-calf 
leather  is  produced.  Although  Russia  sells  large 
quantities  of  hides,  she  depends  largely  for 
leather  on  importations  from  abroad.  The  high 
duties  on  shoes,  about  thirty  per  cent.,  did  very 
little  for  the  development  of  shoe  manufacturing. 
In  spite  of  high  duties,  cheap  labor,  abundance 
of  raw  material,  German  shoe  factories  not  only 
competed  with  factories  in  Russia  but  competed 
also  with  handmade  shoe  factories  while  Russian 
shoe  factories  could  not  compete  with  handmade 
shoes  in  Poland. 

Platinum  is  found  in  Russia  almost  exclu- 
sively. All  of  this  platinum  is  exported  and 
partly  brought  back  by  Russian  jewellers  in  the 
form  of  wrought  jewelry.  That  is  the  more  as- 


THE  COST  OF  LABOR  89 

tonishing  because  the  industry  of  platinum  jew- 
elry requires  practically  only  hand-tools,  (the 
few  American  machinery  devices  for  platinum 
jewelry  are  absolutely  unknown  in  the  European 
markets).  In  spite  of  the  fact  that  the  jewelry 
is  worked  by  hand  no  platinum  jewelry  is  made 
in  Russian  shops  except  some  of  very  simple  de- 
sign. 

Hundreds  of  other  examples  could  be  given  as 
far  as  Russia  is  concerned.  The  most  flagrant 
paradox  will  be  found  in  the  case  of  the  Russian 
fur  market.  Germany  buys  almost  all  Russian 
raw  furs  directly  from  the  peasants  or  at  Russian 
fairs.  The  Russian  furriers  go  to  Leipzig  where 
they  re-purchase  the  furs  dyed  and  worked,  thus 
paying  not  only  the  import  duties  in  Russia  but 
also  the  import  duties  in  Germany,  the  profit  of 
the  manufacturer  and  additional  expenses  of  cross 
traffic  and  brokerage.  As  appears  from  these  ex- 
amples, it  is  much  more  difficult  to  import  for- 
eign manufacturing  efficiency,  trade  secrets  and 
organization  than  to  import  ready-made  fabrics 
in  which  these  items  are  united.  As  seen  in  the 


90     HOW  GERMANY  DOES  BUSINESS 

whole  history  of  peoples,  it  is  not  cheap  labor 
which  will  attract  manufacture  and  enterprise 
but  rather  industrial  organization  that  will  cause 
the  immigration  of  cheap  laHor.  It  may  be  gen- 
eralized by  saying  that  cheap  values  are  more 
easily  importable  than  dear  ones.  Labor  being 
an  export  article  as  any  other,  countries  such  as 
Italy,  Austria  and  Russia  will  export  men  rather 
than  import  organization — capital.  It  is  easier 
to  induce  working  men  to  change  their  abode  than 
to  transplant  manufacturers  and  organizers  to 
whom  a  great  reward  or  inducement  has  to  be 
made.  Besides,  until  now,  the  overproduction  of 
workingmen  has  been  far  in  excess  of  the  overpro- 
duction of  industrial  promotion  and  organization. 


XVIII 

GERMANS    AS    IMPORTERS    AND    RE-EXPORTERS 

WE  have  already  mentioned  the  role  the  Germans 
played  as  intermediaries  in  national  trade.  It  is 
easily  understood  why  Germans  were  very  well 
situated  to  do  their  buying  on  the  best  terms. 
As  they  had  to  study  the  conditions  of  foreign 
countries  when  selling  goods  to  them,  naturally 
they  took  advantage  of  their  knowledge  of  condi- 
tions in  buying  goods.  In  fact,  they  largely 
bought  not  only  for  their  own  need  but  for  man- 
ufacturing and  re-exporting.  Buying  with  them 
became  an  art,  for  they  knew  the  weak  spot  of 
every  nation  as  well  as  the  best  seasons  in  every 
region  for  buying. 

It  is  known  that  German  beer  was  made  chiefly 
with  barley  of  the  Russian-Polish  region  where 
Germany  kept  special  purchasing  agents.  Ele- 
vators for  grains  exist  in  Russia,  but  gradings  are 

91 


92    HOW  GERMANY  DOES  BUSINESS 

unknown.  A  great  deal  of  the  Russian  grain 
trade  passed  through  Germany  not  only  because 
of  the  German  differential  freight  tariffs,  but 
principally  because  the  German  supplied  the 
standardization  and  grading  methods  which  Rus- 
sia lacked.  Grain,  wood,  hides,  starch,  etc.,  are 
sold  by  Russia  in  bulk  in  the  haphazard  way. 
Quantity  is  the  only  specification  in  that  coun- 
try. The  Germans  were  the  only  ones  who  were 
able  to  buy  under  conditions  where  standards 
were  absent;  they  afterwards  classified  the  ma- 
terials according  to  established  standards  and 
sold  them  to  other  nations. 

Repeated  attempts,  known  to  me  personally, 
by  the  French  and  English  to  buy  direct,  re- 
sulted in  dissatisfaction  to  the  buyer  as  well  as 
to  the  seller.  In  fact,  the  importer  rarely  re- 
ceived even  approximately  the  kind  or  quality 
of  goods  he  ordered.  In  some  instances  he  would 
receive  materials  of  a  quality  for  which  he  had 
no  use  whatsoever.  On  the  other  hand  the  Rus- 
sian exporter  had  infinite  trouble  with  his  French 
and  English  buyers  and  could  not  understand  the 


GERMANS  AS  IMPORTERS         93 

reason  for  their  dissatisfaction  and  claims.  Both 
of  them  preferred  to  deal  with  Germany.  The 
Germans,  aware  of  the  weakness  in  the  methods 
of  the  Russian  exporters,  did  not  hesitate  to  take 
advantage  of  it.  Their  efforts  in  buying  grains, 
hides,  horses,  cattle,  etc.,  direct  from  the  peasants 
went  on  with  the  same  scientific  harshness  which 
they  showed  in  other  transactions. 

A  few  years  ago,  in  order  to  counteract  these 
efforts,  a  law  was  proposed  in  the  Russian  Duma 
that  the  government  monopolize  the  foreign  trade 
in  grains  in  this  manner:  "Grain-Paper  Cur- 
rency" was  to  be  issued  against  the  deposits  of 
grain  brought  to  the  elevators  by  the  peasants. 
A  corresponding  advance  was  to  be  paid  to  them 
in  this  grain-paper.  Primarily  this  arrangement 
was  meant  to  relieve  the  peasants  from  the  neces- 
sity of  selling  their  grain  when  prices  were  low. 
But  the  State  Institution  was  to  go  further;  it 
was  to  keep  special  agents  abroad  and  to  have  a 
well  equipped  Grain  Intelligence  Bureau.  This 
Bureau  was  to  follow  the  movements  of  grain 
in  all  the  world  markets  and  to  execute  sales  on 


94     HOW  GERMANY  DOES  BUSINESS 

the  best  conditions  of  time  and  place.  The 
paper  currency  was  to  be  redeemed  with  the  pro- 
ceeds obtained  from  sales  and  withdrawn  from 
circulation,  or  it  was  to  be  kept  for  redemption 
as  a  sinking  fund  and  the  grain  paper  annihi- 
lated whenever  the  treasury  or  official  State  In- 
stitution should  get  hold  of  it. 

This  proposed  law  was  never  enacted.  It  is 
very  probable  that  if  private  initiative  is  unable 
to  promote  the  grading,  standardizing  and  gen- 
eral improvement  of  merchandising  methods,  and 
to  organize  the  sale  of  Russian  raw  materials,  the 
Government  will  probably  have  to  revive  the 
grain  project  and  analogous  measures  of  syn- 
dicalization  of  Russia's  chief  export  products, 
be  it  but  for  the  sake  of  the  regulation  of  Rus- 
sian exchanges.  In  the  lack  of  methods  of  stand- 
ardization not  only  in  merchandizing,  but  in 
manufacturing  as  well,  as  in  other  commercial 
activities,  such  as  banking,  credits,  etc.,  lies  per- 
haps the  chief  reason  for  many  a  handicap  in  in- 
ternational transactions.  The  absence  of  stand- 
ards, more  than  any  other  reason,  keeps  the  less 


GERMANS  AS  IMPORTERS         g$ 

civilized  countries  from  making  progress  and  ex- 
panding in  international  commercial  relations. 
The  chief  need  is  to  elaborate  standards.  Im- 
porters must  have  a  clear  idea  not  only  as  to  the 
standard  type  of  goods  when  they  give  or  eventu- 
ally renew  their  orders,  but  also  as  to  the  standard 
time  of  delivery.  They  must,  further,  have 
standards  as  to  the  smallest  technicalities,  as  for 
instance  packing,  charges,  limit  of  time  within 
which  they  may  expect  an  answer  to  a  letter,  in- 
quiry or  order. 

When  such  standards  are  elaborated,  the  buyer 
has  an  exact  idea  of  his  purchase  and  the  seller  of 
the  exact  desire  and  need  of  his  customer.  The 
Germans  understood  this  thoroughly  and  there- 
fore carried  a  great  deal  of  foreign  trade.  For 
the  nation  where  such  standards  were  wanting, 
the  Germans  fulfilled  an  important  function, 
that  of  a  clearing  house  of  standards.  They  had 
the  trouble  of  sorting  and  therefore  the  benefit  of 
standardization.  They,  however,  went  even  fur- 
ther than  an  intermediary  usually  goes.  German 
jobbers  would  contract  in  advance  with  certain 


96    HOW  GERMANY  DOES  BUSINESS 

producers  at  a  time  of  depression  and  low  prices, 
corner  the  merchandise  and  put  it  on  the  market 
at  a  time  of  revival  of  business,  thus  very  often 
competing  with  the  producer  himself.  In  some 
other  instances  they  appropriated  to  themselves 
things  which  did  not  belong  to  them.  About  the 
time  of  the  Chemical  Exhibition  in  New  York  in 
1916,  I  found  in  the  Journal  of  Commerce  an 
illustration  of  this  fact.  A  certain  chemical  pro- 
duced only  in  Russia  was  bought  up  by  Germany 
and  sold  as  a  German  product.  The  circum- 
stance of  war  was  necessary  to  show  the  world 
that  the  product  is  to  be  had  only  in  Russia. 
This  eloquently  shows  German  power  in  organiza- 
tion and  merchandising. 


XIX 

GERMANS    AS    FOREIGN    INVESTORS 

THE  role  played  by  Germans  in  international  fi- 
nance is  very  often  disregarded.  The  volume  of 
foreign  securities  on  German  bourses  was  only  a 
trifle  less  than  that  on  the  French  bourses,  though 
France  is  the  traditional  home  of  foreign  invest- 
ments. 

The  statistics  available  are  far  from  being  ex- 
act, i.  Very  often  securities  were  offered  in 
block  simultaneously  on  different  markets,  and  as 
each  figure  on  the  total  number  of  shares  it  ap- 
peared as  if  the  entire  block  had  been  absorbed 
by  each  individual  market. 

2.  The  securities  could  be  bought  by  a  French 
bank  for  the  account  of  a  foreign  customer,  or 
they  could  be  bought  first  by  a  French  bank  and 
afterwards  sold  to  foreigners. 

So  much  for  the  factors  which  exaggerate  the 
97 


98     HOW  GERMANY  DOES  BUSINESS 

statistics.     On  the  other  hand  there  are  inflowing 
securities  which  are  not  recorded  in  the  statistics. 

3.  Some  securities  are  imported,  but  not  listed 
on  the  stock  exchange. 

4.  Other  securities  are  bought  by  bankers  in  the 
course  of  their  operations,  as  in  combined  arbi- 
trage in  securities  and  foreign  bills.     In  France 
this  is  exemplified  in  the  service  organized  by  the 
"Societe  Centrale  de  Banques  de  Provinces"  for 
selling  imported  securities  to  provincial  banks. 
It  is  known  that  French  investors  bought  a  great 
number  of  British  and  Dutch  rubber  securities  at 
treble  prices  during  the  very  height  of  the  boom 
in  1910.     There  are  malicious  tongues  which  as- 
sert that  the  French  did  not  buy  but  the  English 
sold  to  them.    Such  movements  of  securities  elude 
statistics. 

The  same  ambiguity  exists  in  the  statistics  of 
every  country.  Therefore  these  data  have  a  rela- 
tive if  not  an  absolute  value,  the  errors  counter- 
balancing each  other. 

In  1905,  the  value  of  foreign  securities  in  Ger- 
many reached  the  sum  of  $1,230,000,000  against 


AS  FOREIGN  INVESTORS  99 

$600,000,000  in  France.  In  Germany's  case, 
more  than  half  the  sum  included  loans  to  govern- 
ments. In  1907,  foreign  securities  in  Germany 
amounted  to  $1,750,000,000  against  $375,000,- 
ooo  in  France.  That  year,  in  Germany,  the 
holdings  consisted  almost  entirely  of  loans  to  for- 
eign governments. 

There  is,  however,  a  marked  difference  between 
French  and  German  foreign  investments.  French 
investments  are  of  a  more  stable  character,  the 
yearly  average  over  the  ten  years  ending  in  1911 
varying  within  narrower  limits.  The  yearly 
average  for  ten  years  of  French  foreign  invest- 
ments was  about  23%  more  than  the  German 
average  for  the  same  time: 

$625,000,000  in  France. 

$510,000,000  in  Germany. 

At  the  same  time,  the  yearly  minimum  of  for- 
eign securities  held  by  France  was  two  and  one- 
half  times  larger  than  the  yearly  minimum  held 
by  Germany  for  the  same  period  of  time.  That 
is  very  significant.  In  France,  foreign  invest- 
ments, as  in  England,  are  more  a  business  in 


ioo     HOW  GERMANY  DOES  BUSINESS 

themselves,  and  of  a  far  greater  speculative  char- 
acter than  in  Germany. 

It  must  not  be  forgotten  that  the  statistics  given 
show  only  what  we  shall  call  "visible  invest- 
ments." The  invisible  investments  represent  such 
capital  as  is  invested  within  a  country  by  for- 
eigners, and  which  remains  in  the  foreign  country; 
for  instance,  a  German  enterprise  in  France  whose 
securities  do  not  leave  France.  Export  of  funds, 
i.e.,  foreign  investments,  must  not  necessarily  take 
the  form  of  imported  foreign  securities.  The  ex- 
port of  capital  can  take  the  form  of  export  of  fac- 
tories:— goods,  organization,  and  men  combined. 
This  has  been  Germany's  method  of  foreign  in- 
vestments since  the  beginning  of  the  nineteenth 
century,  when,  being  a  borrower  herself,  she  ex- 
ported capital,  enterprise  and  brains  to  Austria, 
Russia  and  Italy,  in  the  guise  of  capitalists  who 
went  abroad  and  organized  industries  there,  such 
as  mining,  public  works  and  factories.  By  this 
method,  as  early  as  1879,  the  Russian  cotton  in- 
dustry was  created  by  Ludwig  Knoop,  a  citizen 
of  Bremen  and  travelling  salesman  for  the  Man- 


AS  FOREIGN  INVESTORS         loi. 

Chester  firm  "Jersey."  As  a  rule,  France  and 
England  used  this  method  less  frequently.  It  is 
true  that  many  of  these  invisible  German  in- 
vestments were  made  rather  with  capital  acquired 
in  the  foreign  country  than  with  capital  exported 
from  Germany,  since  Germans  were  very  seldom 
holders  of  bonds. 

The  big  leaps  from  year  to  year  in  Germany's 
foreign  investments,  as  indicated  by  the  statistics, 
show  that  the  amount  of  such  securities  moved  in 
close  interdependence  with  her  own  trade  oscil- 
lations, at  least  so  far  as  her  visible  investments 
are  concerned. 

If  the  invisible  investments  are  taken  into  con- 
sideration, then  the  assertion  that  Germany  in- 
vested only  in  her  colonies,  Austria,  and  to  some 
extent  in  the  Orient,  is  a  very  misleading  one. 
As  a  matter  of  fact,  as  we  shall  see  later,  Ger- 
many played  a  conspicuous  role  in  the  so-called 
foreign  industrial  investments. 

There  are  no  statistics  whatsoever  as  to  these 
invisible  foreign  investments-  It  is,  however, 
very  probable  that  they  are  far  beyond  the  $500,- 


102   .  HOW  GERMANY  DOES  BUSINESS 

000,000  yearly  average  of  foreign  securities  listed 
by  the  German  stock  exchanges.  A  rough  idea  of 
these  German  invisible  investments  in  the  allied 
countries  could  be  obtained  if  the  per  capita 
wealth  of  the  allied  countries  were  multiplied  by 
the  number  of  German  residents  in  the  correspond- 
ing countries  before  the  war.  The  native  per 
capita  wealth,  however,  is  far  below  the  per  capita 
wealth  of  the  Germans  in  the  countries  of  the  Al- 
lies, since  they  were  chiefly  engaged  in  business. 
Perhaps  the  magnitude  of  the  Germans'  invisible 
investments  in  the  allied  countries  will  some  day 
be  brought  to  light  when  the  statistics  of  seques- 
tered German  interests  in  those  countries  are  pub- 
lished. Even  then,  it  will  not  be  the  whole 
truth,  since  liquidations,  before  and  during  the 
war,  as  well  as  some  clever  arrangements  made  by 
the  Germans,  in  order  to  safeguard  their  capital, 
will  conceal  the  true  situation. 

The  role  played  by  German  banks  in  the  de- 
velopment of  Germany's  foreign  trade  is  well 
known.  It  is  also  known  that  German  banks 
were  the  original  creators  of  all  kinds  of  Indus- 


AS  FOREIGN  INVESTORS         103 

trial,  trade  and  finance  associations  whose  goal  was 
foreign  business.  As  a  matter  of  fact,  German 
banks  did  not  confine  themselves  to  a  few  bank- 
ing functions.  They  were  saving  and  deposit  in- 
stitutions, trust  and  financial  companies,  they  did 
general  commercial  banking  and  foreign  exchange, 
and,  finally,  they  were  promoting  and  adminis- 
trative companies.  They  specialized  in  a  new 
function,  the  export  of  banks,  viz.,  branches  and, 
through  them,  in  the  export  of  industrial  organ- 
izations, just  as  a  railroad  company  finds  it  easier 
to  work  through  a  construction  company.  The 
German  banks  followed  this  logical  reasoning: 
since  we  are  called  upon  to  use  our  funds  to  help 
industrial  organizations,  why  can  we  not  directly 
supervise  and  manage  them?  If  we  can  entrust 
our  money  to  them,  we  can  entrust  it  to  ourselves, 
and  as  financiers  we  see  further  and  are  perhaps 
better  administrators  than  people  to  whom  we 
loan  money.  That  was  the  reasoning*upon  which 
they  acted. 

The  directors  of  these  banks  were  at  once  di- 
rectors of  an  unlimited  number  of  such  organi- 


104     HOW  GERMANY  DOES  BUSINESS 

zations.  The  banks  also  financed  enterprises 
abroad:  the  Deutsche  Bank  together  with  the 
Dresdener  Bank  financed  the  Bagdad  and  Ana- 
tolian railways  in  Turkey  and  Asia  Minor  and  the 
Deutsche  Uberseeische  Electricitats  Gesellschaft 
largely  built  up  Germany's  colonial  enterprises  in 
Asia — cables,  railroads,  mines.  The  Disconto 
Gesellschaft  undertook  financing  in  mining,  rail- 
way and  like  enterprises  in  South  America.  The 
Berliner  Handelsgesellschaft  financed  the  Allge- 
meine  Electricitatsgesellschaft  and  all  its  branches 
abroad.  Other  enterprises,  such  as  the  Nord- 
deutscher-Lloyd  and  the  Hamburg-American  Line, 
were  called  to  life  through  the  combined  financ- 
ing of  different  banks,  partly  through  the  lavish 
use  of  kite-fliers,  drawn  by  one  bank  on  the  other, 
indefinitely  renewed  and  sold  in  foreign  countries. 
The  unrivalled  mastery  attained  by  the  Ger- 
mans in  corporation  finance  in  Europe  is  prover- 
bial. It  was  shown  in  numerous  ways;  but  it  was 
perhaps  most  characteristic  in  the  ability  they  dis- 
played in  surmounting  legal  difficulties  imposed 
by  some  countries  upon  aliens  owning  joint  stock 


AS  FOREIGN  INVESTORS         105 

corporations,  Russian  Poland,  for  instance.  With 
their  remarkable  organizing  ability  and  power  of 
psychological  analysis,  their  readiness  to  corrupt, 
their  permanent  staff  of  promoters,  engineers  and 
financiers,  there  was  hardly  an  obstacle  which  they 
could  not  reduce.  If  time  was  required,  either  to 
overcome  barriers  or  to  study  the  prospects  of  the 
business,  an  option  was  bought  to  forestall  the 
purchase  of  the  business  by  another.  This  is  one 
reason  why  Germans  lost  a  great  deal  of  money 
when  the  war  broke  out,  having  contracted  many 
options,  especially  in  France. 

In  order  to  avoid  legal  friction,  the  German 
organizers  invariably  mobilized  for  chairman- 
ships, retired  generals,  old  fashioned  politicians 
and  other  ornamental,  influential  people  behind 
whom,  as  from  behind  a  screen,  they  were  the 
real,  autocratic  dictators  of  the  companies.  It  is 
not  true  that  Germans  always  assimilated  the  tra- 
ditions of  the  country.  They  did  that  only  when 
it  was  dictated  by  their  business  interests.  In 
France  they  spoke  French  in  their  offices,  but  in 
other  countries,  like  Russia,  towards  which  Ger- 


106     HOW  GERMANY  DOES  BUSINESS 

many  manifested  the  deepest  contempt,  probably 
because  Russia  was  the  country  mostly  enslaved  by 
Germany  from  the  diplomatic  to  the  industrial 
classes,  they  did  not  have  to  take  the  trouble  of 
changing  their  language  and  habits.  In  the  Rus- 
sian office  of  a  German  concern,  one  might  easily 
have  imagined  oneself  in  the  business  district  of 
Berlin. 

In  Italy  the  number  of  German  joint  stock  com- 
panies was  so  large  that  "there  is  not  one  corpora- 
tion which  is  not  under  German  control,  directly, 
indirectly  or  at  least  partly."  (Preziosi.)  All 
the  electrical  industries  in  Italy  and  Switzerland 
were  built  up  and  remained  in  the  possession  of 
German  banks,  sometimes  of  Special  Banks  for 
Electrical  Enterprises,  as  the  Electro  Bank  in 
Zurich  (Fr.  180,000,000),  Bank  fur  Electrische 
Unternehmungen  in  Zurich,  a  bank  of  similar  na- 
ture and  purpose.  These  banks  were  in  their  turn 
"linked"  (this  will  be  explained  later)  by  the  Ger- 
man banks  and  large  industrial  corporations,  as 
the  Deutsche  Bank  and  the  Allegemeine. 

It  will  be  asked  by  what  methods  the  Germans 


AS  FOREIGN  INVESTORS         107 

actually  secured  hold  on  so  many  foreign  joint 
stock  corporations.  This  will  be  answered  in  the 
chapters  following. 


XX 

THE    METHOD   OF   THE    CHAIN 

I  HAVE  already  mentioned  that  Germans  were 
masters  in  corporation  finance,  their  only  rivals 
perhaps  being  Americans.  They  were  scientif- 
ically trained  in  it  and  the  art  of  their  work  con- 
sisted chiefly  in  what  Signor  Prezioso  in  his  "La 
Germania  alia  conquista  dell'Italia"  and  in  his 
"La  Banca  Commerciale"  calls  //  Metodo  della 
Catena,  which  means  "the  method  of  the  chain," 
thanks  to  which,  with  practically  no  capital,  the 
Germans  got  controlling  interests  in  the  industries 
they  desired.  This  is  how  the  method  operated. 
The  Germans  furnished  the  nucleus.  A  pro- 
moting company  was  formed  with  a  small  capital. 
This  capital  could  be  procured  in  a  number  of 
ways,  such  as  through  German  banks  which  were 
the  more  willing  to  assist  because  the  capital  so 
generously  offered  was  not  always  German.  Very 

108 


THE  METHOD  OF  THE  CHAIN     109 

often  a  bank  was  exported  to  a  foreign  country 
and  took  up  the  functions  of  studying,  financing, 
promoting  the  corporations,  as  in  the  case  of  elec- 
tric works  and  enterprises  in  Italy  and  Switzer- 
land. The  company  studied  the  scheme  and  its 
prospective  profits  thoroughly, — options  were 
bought  and  taken  up ;  after  the  company  had  been 
running  for  some  time,  it  was  capitalized  on  the 
basis  of  the  estimated  profits,  in  accordance  with 
the  normal  security  rates  of  the  given  security 
market.  In  order  to  procure  the  working  capital, 
preferred  stock,  convertible  bonds  and  sometimes 
even  bonds  were  issued  to  the  public.  The  com- 
mon stock,  representing  chiefly  the  difference  be- 
tween the  cost  and  the  capitalization  of  the  com- 
pany, was  taken  up  by  the  promoters  who  thus  au- 
tomatically and  autocratically  became  the  major- 
ity of  the  board  of  directors.  In  case  the  pre- 
ferred stockholders  had  to  be  offered  voting  rights, 
the  Germans  did  not  fear  the  loss  of  their  control, 
because  they  held  the  common  stock.  If  common 
stock  had  to  be  offered  to  the  public  to  raise  more 
working  capital,  the  Germans  did  not  fear  this 


no    HOW  GERMANY  DOES  BUSINESS 

either,  because  they  knew  that  in  most  cases  the 
holders  could  not  furnish  a  majority  of  directors 
capable  in  the  sense  of  finance,  industry,  and  busi- 
ness ability,  nor  did  the  non-German  stockholders 
represent  a  compact  body,  united  in  their  aims  as 
the  German  holders  were.  By  clever  manoeuvres 
they  could  themselves  favor  the  partial  election 
of  directors  whose  influence  in  the  business  was 
worthless.  There  were  precautions  they  could 
take,  such  as  to  distribute  the  shares  among  small 
holders,  or  to  sell  them  in  remote  towns. 

The  chairman  was  invariably  well  and  favor- 
ably known  in  the  community,  perhaps  an  old  Sen- 
ator. The  Germans  never  coveted  honors;  they 
left  that  to  the  people  of  the  country  where  they 
traded.  For  themselves  they  kept  the  managing 
work  and  profits.  As  the  European  small  inves- 
tor does  not,  as  a  rule,  attribute  any  value  to  his 
voting  rights,  the  Germans  by  easy  manipulation, 
secretly  gathered  these  rights,  and  thus  controlled, 
though  they  actually  held  but  a  small  part  of  the 
stock.  As  we  shall  see  later,  they  did  this  very 
frequently  by  a  clever  corporation  finance  device. 


THE  METHOD  OF  THE  CHAIN    111 

The  liquid  capital  of  a  corporation,  organized 
as  above,  could  be  invested  in  a  number  of  ways. 
Using  their  influence,  they  invested  these  funds 
in  a  relatively  big  block  of  securities  of  a  company 
in  which  they  wished  to  have  an  interest  or  control. 
More  securities  could  be  issued  by  the  first  com- 
pany if  it  was  strong  and  well  known,  with  the 
sole  purpose  of  investment  in  such  a  corporation. 
By  investing  the  proceeds  more  or  less  largely  in 
the  second  company,  they  could  acquire  a  relative 
majority  and  thus  control  this  second  company, 
because  the  absolute  majority  of  stocks  was  spread 
among  a  number  of  small  investors,  who  do  not 
vote.  The  directors  of  the  first  German  joint 
stock  trade  corporation,  insurance  company,  bank, 
mine  or  industrial  public  service  organization,  etc., 
would,  in  this  way,  become  the  directors  of  the 
second,  or  the  influential  and  leading  working  ele- 
ment in  the  board.  Controlling  the  second  cor- 
poration, they  could  strengthen  the  ties  with  the 
first  corporation,  making  the  second,  in  its  turn, 
buy  the  securities  of  the  first  and  so  make  them 
mutually  linked  and  interdependent.  Again,  in 


112    HOW  GERMANY  DOES  BUSINESS 

the  same  way  as  before,  they  could  make  the  sec- 
ond corporation  buy  shares  of  a  third  company  in 
which  they  would  eventually  get  a  new  interest 
and  control.  The  Germans  were  often  satisfied 
with  only  an  interest  in  a  corporation,  because 
when  such  an  interest  was  once  acquired  they  soon 
became  the  most  active  leaders,  partly  because  of 
their  compactness,  discipline  and  uniformity  of 
interest,  partly  because  of  their  ability.  Ability 
did  not  always  mean  good  business  management 
and  sound  financing.  It  meant  frequently  osten- 
tatious "doctored"  statements,  capitalization  of 
doubtful  values,  such  as  patents  and  plants,  un- 
der "Sundry  Assets."  They  did  this  because,  to 
keep  the  control,  they  had  to  pay  dividends  at  any 
cost  and  thus  content  the  dumb  stockholders  who 
cared  only  for  income.  Again,  it  must  not  be  as- 
sumed that  they  watered  the  capital  under  any 
conditions.  When  the  shareholders  were  people 
of  good  financial  education,  or  the  corporation 
liable  to  big  publicity,  like  an  insurance  company, 
the  statements  were  sober  and  sound.  In  such  in- 


THE  METHOD  OF  THE  CHAIN     113 

stances  other  manoeuvres  were  used.  The  Ger- 
mans always  did  what  they  thought  the  particular 
class  of  people  they  depended  on  wanted  them  to 
do.  That  was  a  great  business  policy.  By  these 
and  other  means  proper  to  corporation  finance,  as 
well  as  by  the  business  management  of  the  cor- 
poration, they  were  sure  to  become  the  efficient 
leaders  of  the  corporation,  though  holding  only  a 
small  interest. 

By  this  "method  of  the  chain,"  they  would 
merge  a  corporation  which  they  controlled  with 
another  one  by  a  mutual  exchange  of  securities 
and  directors  of  the  boards ;  they  would  induce  one 
company  to  invest  in  securities  of  other  compan- 
ies, and  link  them  so  as  to  build  up,  with  a  nucleus 
of  practically  no  money,  a  gradually  enlarging  net 
of  corporations  under  their  control.  Then,  as 
they  became  sure  of  their  hold  on  a  certain  cor- 
poration, they  could  gradually  sell  out  part  of 
their  securities,  probably  by  this  time  advanced  in 
price,  and  use  the  proceeds  for  investing  in  securi- 
ties of  new  corporations.  The  German  directors 


114     HOW  GERMANY  DOES  BUSINESS 

knew  that  they  could  not  be  easily  overthrown,  be- 
cause during  their  presence  on  the  board,  they 
put  the  business  on  a  footing  with  which  they 
alone  were  familiar. 


XXI 

COLLECTING    THE    VOTING    RIGHTS 

HOWEVER,  a  corporation  did  not  always  have  suf- 
ficient liquid  capital  to  invest  in  other  corpora- 
tion securities,  nor  could  it  always  issue  new  se- 
curities with  a  view  to  using  them  for  such  an  in- 
vestment. But  in  order  to  acquire  an  interest  or 
even  a  control  in  a  new  corporation,  the  investing 
of  the  corporation's  own  capital  was  not  abso- 
lutely necessary.  The  voting  rights  of  the  ma- 
jority of  investors  had  no  value  in  European  coun- 
tries, because  the  widely  scattered  investors  cared 
only  for  their  dividends;  and  as  these  rights  were 
unused  in  the  majority  of  cases,  the  Germans  used 
ingenious  strategy  in  collecting  them  and  turning 
them  to  their  advantage. 

The  idea  seems  very  simple.  Since  the  voter 
did  not  take  advantage  of  his  voting  rights,  these 
rights  had  no  value  for  him.  Therefore,  if  some 

"5 


ii6    HOW  GERMANY  DOES  BUSINESS 

other  security  could  be  offered  him  which  would 
have  identically  the  same  value,  price  and  all  other 
features  proper  to  securities,  such  as  safety,  mar- 
ketability, income,  appreciation,  etc.,  it  could  be 
exchanged  for  the  securities  he  held  in  corporation 
A  (as  it  will  be  henceforth  called)  and  in  which 
our  corporation  B  wishes  to  get  an  interest. 
Then,  should  our  corporation  exchange  the  securi- 
ties A  for  B,  it  will  shift  the  voting  right  of  the 
holder  from  the  corporation  A  to  the  corporation 
B.  Corporation  B  is  our  corporation  and  since 
these  rights  to  vote  were  not  used  by  the  holders 
when  in  possession  of  securities  A,  they  will  not 
use  them  when  holding  the  securities  B  for  which 
they  exchanged  them.  But  in  this  way  the  cor- 
poration B  acquired  the  securities  A  and  an  in- 
terest in  this  corporation.  Theoretically  it  seems 
that  such  a  conversion  is  of  easy  practice,  but  prac- 
tically it  is  not  so.  It  was  not  sufficient  to  offer 
in  exchange  a  security  absolutely  identical  to  the 
security  A  which  the  investors  held.  An  induce- 
ment had  to  be  given  such  as  to  make  the  stock  B 
superior  in  some  points,  and  in  none  inferior,  to 


COLLECTING  VOTING  RIGHTS     117 

the  stock  A.  Practically  it  could  be  done  by  offer- 
ing a  price  for  a  voting  proxy;  the  investor  would 
thus  remain  in  the  possession  of  his  security  and 
get  an  additional  income,  or  options  on  the  capital 
stock  could  be  bought  with  the  right  to  take  charge 
of  the  corporation  under  definite  conditions.  But 
that  meant  to  open  his  eyes  to  the  advantage  of 
using  his  right  to  vote. 

The  Germans  found  other  means  for  such  an  in- 
ducement. For  instance,  if  corporation  B  was 
a  large  and  very  well  known  one,  it  could  issue  on 
the  strength  of  the  securities  A,  guaranteed  stocks 
secured  by  the  stocks  A,  dollar  per  dollar.  It 
could  issue  on  their  strength  preferred  stocks,  pre- 
ferred cumulative,  preferred  with  a  guaranteed 
minimum  of  interest,  or  bonds  convertible  in 
shares,  always  secured  by  the  stocks  A.  An  addi- 
tional amount  of  stocks  could  be  issued,  not  with 
the  purpose  of  offering  them  to  the  public,  but  in 
exchange  for  a  certain  amount  of  stocks  of  the 
corporation  B,  which  would  allow  them  mutually 
to  exchange  directors,  the  Germans  being  sure  to 
become  the  leading  element  on  the  board.  It 


ii8     HOW  GERMANY  DOES  BUSINESS 

could  use  one  of  the  many  intermediate  forms 
from  stocks  to  bonds,  or  combinations  of  them  and 
put  on  the  market  such  securities  as  were  war- 
ranted by  the  condition  of  the  security  and  money 
market  and  do  it  at  a  suitable  time ;  for  instance, 
during  a  crisis,  when  dividends  are  passed  and  the 
investor's  faith  in  his  securities  is  shaken.  As  the 
very  reason  of  their  eagerness  to  become  interested 
in  the  corporation  A  implied  that  their  inter- 
vention would  increase  the  income  of  that  cor- 
poration, the  Germans  naturally  could  afford  to 
offer  some  substantial  inducement  to  the  holders 
of  the  securities  A,  if  this  were  necessary.  Some- 
times, when  the  company  A  was  a  small  one,  it  was 
sufficient  for  the  corporation  B  to  act  as  holding 
corporation,  issuing  shares  on  the  strength  of  and 
for  the  amount  of  the  stock  it  held,  thus  vaguely 
guaranteeing  them,  which  did  not  necessarily  mean 
that  it  exchanged  a  less  good  credit  for  a  better  se- 
cured one,  but  one  less  known  for  a  better  known 
one — its  own.  If,  in  order  to  carry  out  this  con- 
version, money  was  temporarily  needed,  a  finance 
bill,  drawn  on  a  "linked"  acceptance  house  in 


COLLECTING  VOTING  RIGHTS     119 

London  or  Paris  was  used.  It  happened  that 
these  manoeuvres  were  sometimes  disclosed,  as  in 
the  case  of  the  mine  industry  in  France,  the  Rus- 
sian cotton  and  electro- technic  industry;  but  the 
Germans'  power  had  already  gone  so  far  that  a 
fight  with  them  was  impossible.  Thus  Knoop, 
the  small  salesman  of  the  firm  "Jersey,"  became  in 
Russia  the  commanding  king  of  one  hundred  and 
twenty-two  cotton  mills. 

To  be  sure,  the  shareholders  profited  also  by 
the  Germans'  policy.  The  Germans  knew  that 
if  this  were  not  so  their  success  would  be  tempo- 
rary. But  the  flow  of  profits  went  into  the  pock- 
ets of  the  Germans,  who  were  managers  of  a  new 
work  of  "chain  corporations"  and  fixed  their  sal- 
aries themselves.  Naturally,  as  holders  of  com- 
mon stock,  they  harvested  all  the  fruits  of  the  suc- 
cessful corporations  created  by  them. 

The  "chain  policy,"  backed  by  the  policy  of 
dumping,  went  beyond  a  given  state  and  was 
worked  out  in  many  countries,  with  a  view  to  con- 
trolling certain  special  industrial  lines  all  over  the 
world,  as  the  chemical  industry,  for  instance.  It 


120    HOW  GERMANY  DOES  BUSINESS 

is  said  that  the  Banque  de  Paris  et  Pays-Bas  in 
France,  the  largest  "banque  d'affaires,"  as  it  is 
called  there,  and  the  Banca  Commerciale  in  Rome 
had  their  chain  beginning  in  Germany  and  ending 
in  the  United  States.  That  was  the  German  idea 
of  "geographical  distribution." 


XXII 

ELIMINATION    OF    WASTE 
COLLECTING   THE   WORLD'S   ENERGY 

I  HAVE  already  mentioned  that  the  Germans'  chief 
reliance  was  on  research,  since  their  genius  knew 
very  little  of  inspiration  and  real  inventiveness. 
On  the  contrary,  it  was  the  country  of  application, 
assiduity,  and  thoroughness.  In  the  course  of 
their  tremendous  self-growth  they  became  aware 
of  the  disorganizing,  conflicting  contradictions  of 
our  social  life  which  result  in  waste  of  every  kind. 
The  reason  for  this  waste  lies  in  the  fact  that  a 
million  wills  are  freely  directed  towards  different 
vaguely  determined  ends,  and  the  resultant  force 
of  these  conflicting  cross-purposes  is  what  deter- 
mines our  social  regime. 

This  waste  is  to  be  seen  in  all  the  activities  of 
our  life,  in  the  mills  and  in  the  schools,  in  our 
science  as  well  as  in  our  religion,  in  our  family 

121 


122     HOW  GERMANY  DOES  BUSINESS 

as  in  our  every-day  life.  It  is  in  the  thousands  of 
magazines  and  newspapers  repeating  the  same 
things;  in  our  book  market  where  innumerable 
books  are  written  upon  the  same  problem,  some 
being  absolutely  unnecessary  after  the  appearance 
of  better  books  and  some  little  more  than  copies 
of  what  was  better  presented  before.  It  is  be- 
cause there  is  still  too  little  organization  of  any 
of  our  activities,  because  we  know  only  vaguely 
of  the  existence  of  material  gathered,  and  be- 
cause there  is  no  controlling  force  whatsoever  in 
our  life  now  as  were  the  censors  of  the  middle 
ages,  when  the  fund  of  information  was  small. 

It  is  easy  to  understand  that  the  correction  of 
this  waste  should  begin  in  the  economic  field.  In 
business,  in  the  factory,  it  means  a  saving  of 
money.  The  business  interpretation  of  energy  is 
money.  It  is  there  that  it  was  first  discovered  be- 
cause there  every-day  arguments  for  competition 
are  sought.  Time  and  motion  studies  mean  a  pay- 
ing argument  in  the  hands  of  a  manufacturer. 
Once  this  is  begun,  it  will  naturally  continue  and 
spread  to  all  of  our  activities. 


ELIMINATION  OF  WASTE        123 

In  education,  for  instance,  where  inefficiency 
is  so  flagrant,  there  is  not  so  much  incentive  for  the 
elimination  of  waste  because  all  members  of  so- 
ciety are  affected  equally  and  the  evil  is  thus  neu- 
tralized. But  there  are  indications  of  change, 
now  that  necessity  has  created  opportunities  for 
specialized  training  which  yields  quicker  and  more 
efficient  results  than  the  wasteful  method  of  tra- 
ditional education  produced.  This  tendency  is 
pregnant  with  possibilities. 

In  Germany  the  movement  toward  efficiency 
was  not  limited  to  such  appliances  as  those  used 
in  the  iron  furnaces  to  catch  gases  and  use  them 
for  driving  the  engines  of  the  steel  mills,  or  to 
utilize  the  smoke  for  making  tar,  etc.  It  ex- 
tended to  coordinating  the  forces  of  industry  in 
an  organization  known  as  the  "Cartel,"  to  the 
"syndicalization"  of  labor,  etc.  It  was  applied 
to  special  bureaus  of  information  of  every  kind, 
such  as  the  Bureau  of  Information  for  Vocational 
Employment  where  a  man's  capabilities,  disposi- 
tion, and  material  means  were  investigated  with  a 
view  to  advising  him  in  detail  as  to  a  suitable 


124     HOW  GERMANY  DOES  BUSINESS 

career,  its  requirements  in  time,  money  and  study 
and  its  possible  returns.  Every  cultured  German 
has  his  daily  programme  as  to  when  and  how  to 
do  everything,  the  smallest  detail  having  its 
proper  place.  It  is  said  that  the  president  of  a 
great  corporation,  during  an  important  talk  with 
a  large  buyer,  heard  the  clock  striking  twelve  and 
said  to  his  guest,  "Now,  mein  Herr,  we  must  in- 
terrupt the  conversation  and  we  will  go  to  have 
dinner  together.  It  is  the  time." 

The  beneficial  results  of  these  efficiency  meth- 
ods showed  themselves  in  many  ways.  Although 
Germany  has  fifty  less  blast  furnaces  than  Eng- 
land, Germany  in  1907  produced  2,000,000  more 
tons  of  pig  iron,  thanks  to  her  system  of  distribut- 
ing labor,  her  coordination  of  industries,  and  her 
mechanical  improvements.  And  yet  it  was  not 
long  ago  that  iron  industries  in  Germany  were 
conducted  by  English  mechanics  and  engineers. 

The  first  apostle  of  the  movement  of  efficiency 
was  Ostwald;  he  launched  the  now  famous  ap- 
peal: "Do  not  waste  energy.  Make  it  valu- 
able." To  him  all  sciences  were  pseudo  sciences 


ELIMINATION  OF  WASTE        125 

unless  they  included  the  art  of  bettering  human- 
ity. Ostwald  created  a  special  bureau  in  Munich 
called  "Die  Briicke,"  an  office  for  elaborating  ef- 
ficient standards  to  facilitate  the  "technic  and 
work  of  scholars."  He  opened  our  eyes  to  many 
other  wastes.  Germans  were  captivated  with 
him.  This  movement  was  followed  by  some  typ- 
ical discipline  which,  as  always,  was  character- 
istic of  that  people  among  whom  some  martyrs 
ended  in  an  insane  asylum.  It  became  a  religion. 
What  they  did  in  social  life  was  paralleled  in  their 
business.  Their  aims  were  clearly  set  forth,  and 
the  research  department  applied  itself  to  working 
out  the  smallest  details.  Research  along  all  lines 
was  made;  actual  experience  on  special  subjects 
was  accumulated  in  special  records  of  the  factory, 
and  new  adaptations  were  turned  to  use.  Re- 
wards were  paid  to  workmen  who  suggested  profit- 
able changes. 

Another  thing  to  be  remembered  is  that  Ger- 
mans put  into  practice  what  in  other  people  re- 
mained but  vague  ideas  and  words.  A  number 
of  people  may  know  and  speak  of  the  same  things, 


126    HOW  GERMANY  DOES  BUSINESS 

and  yet  none  may  think  to  carry  the  ideas  into 
effect.  This  is  daily  apparent  in  small  things. 
But  then  comes  one  with  the  motor  nerves  strongly 
developed  and  the  thing  about  which  we  all  know 
assumes  form.  He  is  the  only  one  who  had  com- 
plete faith  in  his  idea,  the  others  were  "poets  of 
words."  The  Germans  did  not  talk  efficiency 
and  system,  they  did  them.  Not  only  did  they 
study  what  commercial  use  could  be  made  of  the 
by-products  of  an  industry, — the  coke  industry, 
for  example, — and  how  to  extract  these,  but  they 
inaugurated  research  organizations  for  special 
purposes.  When  the  problem  of  electrification  of 
railroads  arose  a  special  research  study  committee 
was  created.  A  study  body  preceded  the  incor- 
poration of  any  important  industrial  society. 
This  was  not  exclusively  a  German  idea  for  it  is 
the  rule  in  America  to  appoint  a  study  commission 
before  any  big  investment  is  made.  It  is  not, 
however,  commonly  employed  here  in  promoting 
small  enterprises.  The  Germans  methodically 
used  their  argument  of  studies.  The  same  spec- 
tacled "doctors"  who  won  the  war  of  1871  won 


ELIMINATION  OF  WASTE        127 

the  economic  war  ended  in  1914.  This  they  did 
the  more  easily  because  they  were  the  only  ones 
in  arms,  while  their  enemies,  deep  in  slumber,  were 
not  even  aware  of  the  existence  of  an  economic 
war. 


XXIII 

GERMAN    INTERNATIONAL    POLICY    IN     FOREIGN 
TRADE 

GERMAN  international  policy  could  be  character- 
ized as  a  union  of  bankers,  professors,  manufac- 
turers, the  Foreign  Minister  and  the  State  itself. 
It  was  a  union  formed  on  a  purely  business  basis 
and  business  methods  were  the  underlying  logic  of 
the  international  policy.  No  other  nation  than 
the  German  nation  so  clearly  and  definitely  set  up 
its  business  purposes  and  business  methods,  be- 
cause no  other  nation  could  unite  the  different  con- 
tradictory wills  of  its  members  so  efficiently. 
The  reason  for  this  lies  primarily  in  the  German 
character  accustomed  to  discipline  and  obedience, 
and,  again,  in  the  continuous  success  of  this  nation 
— success  kills  every  revolutionary  tendency.  That 
is  why  the  orders  elaborated  and  sent  from  above 
were  so  diligently  and  emphatically  executed  by 

128 


INTERNATIONAL  POLICY         129 

the  people.  Other  nations  were  undoubtedly 
eager  to  develop, — that  is  the  raison  d'etre  of  any 
nation, — but  the  ways  and  means  employed  by 
them  to  bring  about  this  development  were  con- 
fided to  politicians  rather  than  to  experts,  viz., 
scholars  and  business  men.  The  Germans  looked 
for  the  practical  benefit-bearing  side  of  a  science, 
for  science  applied.  Long  before  Ostwald  wanted 
to  make  a  business  of  science  the  Germans  had 
already  made  a  science  of  business.  German 
international  policy  was  an  international  enter- 
prise, a  business  enterprise  conducted  on  a  scien- 
tific (science  means  logical  study)  basis  under  the 
benevolent  auspices  of  the  imperial  government. 

This  assistance  given  by  the  State  to  German 
concerns  in  their  foreign  trade  enterprises  applied 
to  little  as  well  as  big  things.  It  was  effected 
through  diplomacy  and  through  minor  factors. 
Long  ago  all  the  world  wondered  how  Germany 
could  import  gold  when  her  rates  of  exchange  al- 
most reached  the  gold  export  point.  It  appeared 
as  if  German  bankers  were  conducting  ruinous 
financial  transactions.  In  fact,  to  import  at  gold 


130    HOW  GERMANY  DOES  BUSINESS 

export  rates  means  to  pay  for  gold  with  a  short 
term  promise  to  reimburse  with  more  gold  the 
amount  of  the  finance  bills  with  which  Germany 
paid  for  the  importation  of  gold,  inasmuch  as  Ger- 
many pretended  to  be  on  a  gold  basis.  As  the 
bankers  could  not  do  business  at  ruinous  rates,  it 
stands  to  reason  that  this  condition  was  due  to  in- 
fluence from  "higher  up." 

As  a  matter  of  fact  it  is  known  that  the  Reichs- 
bank  offered  to  bankers  and  importers  of  gold 
some  material  advantages,  such  as  advances  of 
money  without  interest  until  the  arrival  of  the 
gold  in  Germany.  This  was  done  partly  because 
Germany  was  always  in  need  of  gold,  it  being  the 
basis  of  all  credit  systems.  As  Germany's  credit 
manufacturing  necessities  grew  more  quickly  than 
those  of  any  other  country,  as  is  reflected  in  the 
growth  of  her  banking,  she  was  badly  in  need  of 
gold — gold  hungry  all  the  time.  The  Reichs- 
bank,  as  well  as  other  large  banks,  in  expectation 
of  an  increase  in  their  gold  reserves  from  the  pros- 
pective gold  importations  could  allow  their  de- 
posit accounts  to  swell  and  thus  increase  their 


INTERNATIONAL  POLICY        131 

loaning  capacity  together  with  their  earning  ca- 
pacity. They  could,  in  anticipation  of  increased 
prospective  profits,  abandon  part  of  them  and  im- 
port gold  at  a  time  when  an  individual  banker 
would  find  it  more  advantageous  to  export  it  were 
he  allowed  to  do  so  by  those  "higher  up,"  who 
controlled  the  situation. 

It  is  unnecessary  to  mention  the  innumerable 
German  export  Vereine— export  association — 
which  covered  the  country.  No  other  country 
had  such  a  voluminous  literature  on  exporting  as 
Germany.  The  intimate  touch  of  intelligent  con- 
suls and  merchants  is  another  thing  from  which 
German  business  men  derived  advantage.  Be- 
fore leaving  for  a  foreign  country  a  merchant 
would  get  personal  letters  of  introduction  from  the 
Chamber  of  Commerce  to  the  German  consuls 
abroad.  The  consul  would  receive  him  warmly 
and  facilitate  his  work  in  every  way  possible. 

The  Cartel  is  another  feature  of  Germany's  in- 
ternational policy  in  foreign  trade.  Cartels  are 
syndicates  embracing  almost  every  branch  of 
manufacturing.  These  Cartel-corporations  were 


132     HOW  GERMANY  DOES  BUSINESS 

organized  sometimes  for  the  general  purpose  of 
mutual  information  as  to  conditions  in  the  foreign 
countries,  methods  of  merchandising,  credits,  etc. 
Sometimes  they  were  organized  for  the  regulation 
of  prices  at  which  certain  products  were  to  be  sold 
in  foreign  countries;  sometimes  not  only  to  fix 
uniform  prices  but  also  to  regulate  the  quantities 
to  be  sold  abroad.  Every  member  would  be  al- 
lotted a  certain  volume  of  business  to  be  done  and 
sometimes  a  certain  territory.  None  of  these  car- 
tels, however,  ever  pooled  their  capital  as  does  the 
real  American  trust. 

Another  feature  is  the  well  known  "dumping" 
as  practiced  by  the  coal,  steel,  paper,  sugar,  and 
spirits  syndicates.  The  purpose  of  such  syndi- 
cates was  to  undermine  a  similar  industry  in  a 
country  where  they  would  dump  such  merchandise 
in  order  to  take  hold  of  the  industry  thereafter. 
In  selling  its  products  abroad  at  prices  consid- 
erably below  the  cost  price,  the  syndicate  had  to 
reimburse  itself  by  demanding  higher  prices 
within  Germany.  It  may  safely  be  inferred  that 
they  needed  a  benevolent  government's  help  and 


INTERNATIONAL  POLICY        133 

its  toleration  of  syndicates  and  the  higher  prices 
at  which  they  sold  goods  to  German  consumers. 
It  was,  moreover,  the  government  which  protected 
them  by  prohibitive  tariff  duties,  without  which 
they  could  not  sell  goods  to  the  home  consumer  at 
the  highest  prices.  In  recent  years  the  cartel 
policy  was  not  only  tolerated,  but  favored  and  en- 
couraged by  the  German  government,  in  fear  of 
foreign  competition.  Often,  however,  this  dump- 
ing proved  unsuccessful.  Besides  it  always  meant 
a  natural  inflation  of  prices,  the  dissatisfaction  of 
the  working  classes,  and  frequently  ruin  to  the 
capitalists  who  were  responsible  for  giving  part 
of  the  nation's  capital  abroad  gratis  and  in  a 
speculative  effort. 

There  is  a  fatality  about  the  trust  movements 
all  over  the  world.  It  will  not  be  out  of  place  to 
recall  that  in  France,  just  about  the  time  the  war 
began,  a  movement  emulating  the  German  cartel 
was  started  and*  a  syndicate  of  couturiers  (dress 
and  fashion  makers)  was  created.  It  could  not, 
however,  survive  even  the  period  of  the  war,  be- 
ing dissolved  after  less  than  a  year  of  existence. 


134     HOW  GERMANY  DOES  BUSINESS 

Another  feature  of  Germany's  international 
trade  policy  was  the  Getreide-Identitaten  und  Ein- 
fuhrscheine.  Originally  they  were  like  American 
drawbacks  but  very  soon  they  were  received  in 
payment  of  importation  duties.  Their  history 
is  as  follows : 

An  importer  of  grain  was  allowed  to  export  a 
quantity  equal  to  that  which  he  imported.  When 
he  exported  he  received  an  "Einfuhrschein"  with 
which  he  afterwards  could  import  a  corresponding 
quantity  of  grain  without  paying  any  duty. 
Later  these  receipts  became  negotiable  and  a  mar- 
ket was  created  for  them  because  they  were  ac- 
ceptable not  only  in  payment  of  duties  on  the  im- 
portation of  grain  but  for  any  other  importation. 
Thus  they  represented  a  real  general  premium  on 
exports. 

Premiums  on  export  were  also  paid  by  dump- 
ing syndicates  through  premium  paying  clear- 
ing houses  especially  established  for  this  pur- 
pose. These  premiums  were  paid  by  dumping 
syndicates  of  raw  materials  to  exporters  of  pro- 
ducts manufactured  from  syndicalized  raw  ma- 


INTERNATIONAL  POLICY        135 

terials.  The  premium  was  the  difference  in  price 
between  the  raw  material  consumed  in  Germany 
and  abroad  respectively. 

The  dumping  policy  was  obviously  contradic- 
tory to  the  free  trade  economic  school  which  takes 
for  granted  that  no  manufacturer  will  sell  his 
goods  below  the  cost  of  production.  In  reality, 
however,  in  the  course  of  the  capitalistic  develop- 
ment it  became  evident  that  it  is  more  advan- 
tageous to  sell  at  a  loss  for  some  time  than  to  cease 
production  and  not  to  sell  at  all. 

The  manufacturer  usually  reimburses  himself 
for  his  loss  by  increasing  prices  when  times  are 
better.  His  policy  is  thus  based  on  expectations 
and  is  a  speculation  in  time.  The  "dumper" 
brought  to  life  a  new  kind  of  speculation,  a  specu- 
lation in  place.  He  sells  cheaply  in  one  place 
(abroad)  because  he  believes  he  will  get  better 
prices  at  another  place — i.e.,  within  his  own  coun- 
try. 

The  dumping  policy  necessarily  led  to  some 
very  flagrant  contradiction.  For  instance,  if  coal 
was  dumped  abroad  and  sold,  let  us  say  at  $5.00 


136     HOW  GERMANY  DOES  BUSINESS 

per  ton,  while  the  cost  of  production  and  selling 
was  $5.50,  and  if  the  quantity  of  tons  exported  is 
equal  to  the  amount  consumed  within  the  nation, 
the  coal  cartel  will  fix  the  domestic  price  roughly 
as  follows : 

$5.50  cost  of  production,  plus  5oc  loss  on  every 
ton  exported,  plus  20%  on  the  price  of  produc- 
tion of  two  tons  ($11.00)  $2.20  equals  $8.20. 
The  difference  between  the  domestic  and  the  ex- 
port price  is  $3.20. 

Now,  if  a  manufacturer  exports  steel  plates, 
naturally  he  exports,  in  converted  form,  pig  iron, 
coal  and  other  materials  that  enter  into  the  pro- 
duction of  such  plates.  If  he  were  required  to 
pay  $3.20  per  ton  more  than  his  foreign  competi- 
tors to  whom  the  Cartel  sold  coal,  his  competing 
place  on  the  International  Market  would  be  un- 
favorably affected.  Here  comes  the  Clearing 
House  which  pays  back  the  difference  between  the 
two  prices,  in  this  case  $3.20,  on  every  ton  of  coal 
utilized  in  the  production  of  plates  exported. 

Standards  were  established  as  to  the  number  of 


INTERNATIONAL  POLICY         137 

tons  of  coal  needed  for  the  production  of  manu- 
factured articles,  tubes,  wire,  castings,  etc. 

The  exporter  had  but  to  present  the  duplicate 
bill  of  lading  with  specifications  as  to  the  kind  and 
class  of  products  exported,  to  enable  the  Cartel  to 
calculate  the  amount  of  coal  consumed  and  the 
amount  of  money  to  be  returned.  Although 
actually  the  exporter  never  received  the  entire  dif- 
ference between  the  domestic  and  dumping  prices, 
and  the  calculations  were  not  as  simple  as  in  this 
example,  it  is  on  these  principles  that  the  clear- 
ings between  the  Cartels  and  the  exporter  were 
based.1 

Favoritism  in  the  matter  of  railroad  rates  is  an- 
other feature  of  Germany's  trade  policy.  In 
order  to  counterbalance  tariff  duties  of  a  certain 
foreign  country  on  a  certain  article,  or  in  order  to 
have  the  exports  of  a  neighboring  country  pass 
through  Germany  where  profit  in  brokerage,  ship- 

1  A  good  treatise  on  Cartels  is  the  recently  published  pam- 
phlet, "Commercial  Organizations  in  Germany,"  by  A.  J. 
Wolfe  (Special  Agents  Series  No.  78;  Washington,  Depart- 
ment of  Commerce). 


138     HOW  GERMANY  DOES  BUSINESS 

ping,  etc.,  would  be  asked,  special  railway  tariffs 
were  created.  Thus  Russian  exports  were  shipped 
to  the  Baltic  through  Germany  and  from  there  on 
in  German  ships.  It  is  partly  due  to  these  dif- 
ferential railroad  tariffs  that  some  articles  were  of- 
fered cheaper  in  a  foreign  country  than  in  Ger- 
many. 

To  change  rules  to  meet  trade  conditions  was 
exceptionally  easy  and  a  quickly  realizable  law 
for  the  Germans.  Take  the  adoption  of  differ- 
ential freight  tariffs.  It  was  much  easier  to  se- 
cure these  because  of  the  fact  that  the  railroads 
belonged  to  the  state  which  was  always  anxious 
to  lend  intelligent  aid  when  foreign  trade  was 
concerned.  And  it  is  worth  mentioning  that,  in 
spite  of  such  sacrifices,  the  German  railroads 
were  the  only  ones  on  the  European  continent 
which,  though  belonging  to  the  state,  returned 
profits  in  excess  of  fixed  charges. 

That  the  German  chamber  of  commerce  and  the 
commercial  attaches  and  the  German  consular 
service  were  important  and  productive  factors  in 
foreign  trade  policy  is  a  thing  now  commonly 


INTERNATIONAL  POLICY        139 

known.  It  was  the  Chamber  of  Commerce  which 
strongly  urged  among  German  manufacturers  the 
idea  of  being  in  close  touch  with  foreign  custo- 
mers through  special  representatives.  A  big  en- 
gineering concern  in  Prussia  maintained  one  hun- 
dred offices,  and  what  the  Germans  call  "special 
representatives,"  in  different  European  countries. 
The  same  was  done  by  electrical,  chemical  and 
other  industries. 

Other  features  of  Germany's  foreign  policy 
were  her  universally  known  fairs  and  famous  spe- 
cial exhibitions  which  attracted  people  from  all 
over  the  world,  and  thus  were  a  strong  support  in 
her  international  policy.  These  special  exhibi- 
tions were  made  for  a  single  specialty,  as  for  steel 
and  iron  products,  automobiles,  toys,  chemicals. 
In  1905  such  an  exhibition  of  ideal  municipal  gov- 
vernment  was  held  in  Dresden  and  was  visited  by 
municipal  delegates  from  all  over  Europe.  While 
maintaining  these  exhibitions  at  home  the  Ger- 
mans did  not  fail  to  take  an  active  part  in  import- 
ant exhibitions  elsewhere  in  the  world.  A  special 
national  committee  for  foreign  exhibitions  existed 


140    HOW  GERMANY  DOES  BUSINESS 

with  the  sole  purpose  of  investigating  with  the 
help  of  the  government,  international  exhibitions, 
in  which  Germans  might  advantageously  partici- 
pate. 

Among  other  special  exhibitions  held  in  Ger- 
many for  the  last  fifteen  years  were : 

Glass  Painting,                                                Karlsruhe,  1901 

Lithographs,                                                       Leipzig,  1901 

Applied  Art,                                                      Dresden,  1901 

First   Industry   and  Trade  Exhibition,        Diisseldorf,  1902 

Agricultural  Shows,                                        Cologne,  1904 

Hygiene  Milk  Supply,                                     Hamburg,  1904 

Horticultural  Exhibition,                                  Diisseldorf,  1905 

Automobile  and  Bicycle,                                  Frankfort,  1905 

Handicraft  Work  and  Fine  Art,                  Nurnberg,  1906 

Photography,                                                       Munich,  1907 

Life  and  Work  of  City  of  Munich,                  "  1908 

The  German  Brewery,  1909 

Aeronautics,                                                      Cologne,  1909 

Gas  and  Water,                                                    "  1911 

Electrical   Appliances,                                     Munich,  1911 

Hygiene,                                                              Dresden,  1911 

Bavarian  Arts  and  Crafts,                             Munich,  1912 

Aeronautics,                                                        Berlin,  1912 

Construction,                                                       Leipzig,  1913 

The  Book  and  Graphic  Arts,                              "  1914 
and,  just  before  the  war,  the  famous 
"Deutscher  Werk   Bund,"   the   exhi- 
bition   of    distinctively    German   ex- 
pressions    in     all     industries     and 

crafts;                                                          Cologne,  1914 

The  "Central  Information  Agency  for  Foreign 


INTERNATIONAL  POLICY        141 

Trade,"  which  was  created  and  maintained  by  Ger- 
man manufacturers,  was  a  powerful  expert  insti- 
tution. It  was  divided  into  many  departments, 
such  as  custom  tariff  department,  banking,  pat- 
ents, transportation  and  traffic,  and  international 
legislation. 

A  proposed  agency  was  a  semi-official  German 
organization  for  influencing  the  foreign  press.  In 
this  the  foreign  ministry,  the  Deutsche  Bank,  the 
steamship  companies  and  the  large  export  houses 
cooperated  with  the  Wolff  Press  Bureau.  About 
to  be  organized  in  1914,  it  would  have  become  a 
powerful  means  of  propaganda.  The  various 
concerns  were  invited  to  subscribe  to  this  pro- 
posed corporation  an  amount  equivalent  to  their 
respective  foreign  advertising  expenses.  Half  of 
the  capital  stock  was  about  to  be  subscribed  by 
the  state,  which  was  to  give  to  the  organization 
a  monopoly  of  foreign  cable  and  other  informa- 
tion. It  was  to  be  a  syndicate  which  should  or- 
ganize and  render  efficient  the  advertising  ener- 
gies of  German  concerns.  The  war  killed  this 
project  at  its  very  birth. 


142    HOW  GERMANY  DOES  BUSINESS 

Finally,  a  distinctly  German  creation  was  the 
Commercial  Association  of  Stettin,  the  purpose  of 
which  was  to  provide  funds  to  young  men  desir- 
ous of  going  abroad  to  study  commercial  condi- 
tions. Funds  were  advanced  to  young  men  who 
gave  a  solemn  promise  that  they  would  use  all 
their  knowledge  and  would  try  to  get  as  much  in- 
formation as  they  could  for  promoting  the  trade 
of  Stettin. 

These  are  only  a  few  little  details  of  the  great 
structure  which  comprise  German  international 
trade  policy. 


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AN  3 1 1962 


REC'D  LD 

MAY  251962 

OCT  2  5 


LD  21-50m-8,'32 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


